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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Dividends and other company distributions: no tax credits on non-qualifying distributions: example

Example of tax charge on non-qualifying distribution

Michael holds 10000 partly paid up £1 redeemable shares in Bonus plc. The amount paidup is 75 pence per share. The company uses its shareholders’ funds to credit thepartly paid shares to make them fully paid. Michael has received a non-qualifyingdistribution of £2500, and is treated as having paid income tax on the distribution atthe dividend ordinary rate, that is £250.

Shortly afterwards, Bonus plc repays 25% of its share capital. Michael now holds 7500shares and has received a qualifying distribution of £2500. The tax credit is £278 (2500x 1/9) making a gross amount of £2778. Tax at the dividend ordinary rate of 10% is £277,of which £250 has been satisfied by the notional income tax on the non-qualifyingdistribution.

Liability at dividend upper rate

If Michael is liable at the dividend upper rate the tax payable on the non-qualifyingdistribution will be

2500 @ 32.5% 812.50
Less notional tax 250.00
Additional tax due 562.50

Michael’s liability on the qualifying distribution will be on the gross distributionof £2778 (2500 + the tax credit of 278).

Gross distribution 2778 @ 32.5% 902.85
Less tax credit 278.00
Tax due 624.85
Less tax paid on non-qualifying distribution 562.50
Additional tax due 62.35