Key facts
- Dividends received by a UK company are generally exempt from Corporation Tax.
- Dividends paid by a company are not deductible — they come out of post-tax profits.
- The old “franked investment income” concept was abolished from April 2016.
- Dividends paid must come from distributable reserves — otherwise they are unlawful.
- Exempt dividends still count as “augmented profits” for marginal relief calculations.
Dividends Received by Companies
When a UK company receives dividends from another UK company (or most overseas companies), those dividends are exempt from Corporation Tax. This prevents the same profits being taxed twice — once in the paying company and again in the receiving company.[2]
The exemption covers most ordinary dividends, including:
- Dividends from UK companies (regardless of shareholding size)
- Dividends from overseas companies that fall within one of the exempt classes
- Distributions in respect of non-redeemable ordinary shares
Exceptions: The exemption does not apply to dividends received as part of a tax advantage scheme, or certain dividends from overseas companies that do not fall within the exempt categories. Anti-avoidance provisions target arrangements designed to convert taxable income into exempt dividends.[2]
Dividends Paid by Companies
Dividends paid to shareholders are not a deductible expense for Corporation Tax purposes. They are a distribution of profit, not a cost of generating that profit. This is a fundamental distinction between dividends and salary.[1]
The key consequences are:
- The company pays CT on its full profits, then distributes dividends from what remains
- Dividends do not reduce the company’s CT bill
- The individual shareholder receiving the dividend pays Income Tax on it (at dividend tax rates)
Distributable Reserves & Unlawful Dividends
Under company law (Companies Act 2006), dividends can only be paid from distributable reserves — accumulated realised profits less accumulated realised losses. If a company pays a dividend exceeding its distributable reserves, it is an unlawful dividend.[4]
| Scenario | Consequence |
|---|---|
| Dividend within distributable reserves | Lawful — normal tax treatment applies |
| Dividend exceeds distributable reserves (shareholder unaware) | Company may have a claim for repayment; directors may be personally liable |
| Dividend exceeds reserves and shareholder knew or ought to have known | Shareholder must repay the excess to the company |
Tip: Before declaring any dividend, always check management accounts to confirm adequate distributable reserves exist. This is especially important for director-shareholders of small companies who may extract funds regularly.
Franked Investment Income (Abolished)
Before April 2016, dividends received by a company were known as “franked investment income” (FII). They carried a notional tax credit. This concept has been abolished and replaced by the simpler dividend exemption described above.[2] Today, exempt dividends are simply left out of taxable profits when you complete your CT600 online — though they still matter for the calculations below.
However, exempt dividends are still relevant for certain calculations:
- Augmented profits — exempt dividends are added to taxable profits to determine whether the company falls above or below the marginal relief thresholds (£50,000 / £250,000)
- Quarterly instalment payments — augmented profits determine whether a company must pay CT by quarterly instalments
Types of Distribution
The CT legislation treats “distributions” broadly. As well as ordinary cash dividends, the following may be treated as distributions for tax purposes:[1]
- Dividends in specie — transferring assets to shareholders instead of cash
- Bonus issues of redeemable shares in certain circumstances
- Interest on certain securities that exceed a commercial rate
- Benefits to participators from close companies that are not otherwise chargeable
Non-cash distributions can create complex valuation and tax issues. Professional advice is recommended.
Frequently Asked Questions
Are dividends received by a company subject to Corporation Tax?
No. Dividends received by a UK company from another UK company (or most overseas companies) are generally exempt from Corporation Tax. This prevents the same profits from being taxed twice.
Can a company deduct dividends paid from its Corporation Tax?
No. Dividends paid are not a deductible expense. They are a distribution of post-tax profits, so the company pays Corporation Tax on its full profits before distributing dividends.
What are distributable reserves?
Distributable reserves are accumulated realised profits less accumulated realised losses. Under company law, dividends can only be paid from distributable reserves. Paying a dividend that exceeds them is unlawful.
Do exempt dividends affect the Corporation Tax rate?
Yes. Although exempt from Corporation Tax, dividends received count as “augmented profits” for the marginal relief calculation and can push a company above the £50,000 or £250,000 thresholds into a higher effective rate.
Further Reading
- Salary vs Dividends — which is more tax-efficient for director-shareholders?
- Directors’ Loan Accounts — another way directors extract funds
- Marginal Relief — how augmented profits affect your CT rate
- Close Companies — special rules for companies controlled by few shareholders
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Sources
- Company Taxation Manual: Distributions — HMRC
- Corporation Tax: dividend exemption — HMRC
- Tax on dividends — GOV.UK
- Distributions: general guidance — HMRC