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Foreign Dividends – Avoid getting taxed twice!

Arif Patel

Arif Patel | Accountancy & Tax Service Director

Thursday 4th Mar, 2021

These days it's easy for stock market investors to buy shares in overseas companies, amongst the most popular being US companies.

Foreign dividends are often subject to withholding tax - the overseas company will deduct tax before paying you the dividend. However, the UK has double tax treaties with many countries that reduce the amount of foreign tax payable (usually to 10% or 15%). In the US the dividend withholding tax rate is normally 30%.

However, in terms of the double tax agreement between the US and UK, the amount of withholding tax can be reduced to 15% by completing form W-8BEN, issued by the US Internal Revenue Service (IRS). Most online stockbrokers will handle these forms on your behalf so the process is relatively simple.

The double tax agreement also provides a specific exemption for pension schemes, which means US dividends can be received tax free if the shares are held inside your SIPP or another pension scheme. The double tax agreement does not, however, recognise ISAs. ISA investors are still subject to withholding tax.

If your overseas shares are held outside an ISA or SIPP you may have to pay UK income tax on your overseas dividends if you have used up all your 0% dividend rate tax band. However, you may be able to claim Foreign Tax Credit Relief when you submit your tax return. This allows the overseas tax paid to be deducted from the amount of UK tax owing. Bear in mind though that the amount deducted cannot exceed the UK tax payable on that income.

Related article - Preparing for the 2023-24 tax year

As we draw to the end of another tax year it’s a good idea to consider the upcoming changes the next tax year will bring. Sometimes the changes a new year brings can be small but even if they appear so, there are times they can impact individual’s income in a larger way.

Preparing for the tax year ahead
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