I own shares in American companies via a Save As You Earn (SAYE) scheme. As dividends are taxed at source, at a rate of 15%, do I have to include them when calculating my £2,000 dividend allowance for this year?
If I do, HMRC will take a large chunk out of the allowance. This does not seem fair as the tax has been taken and is not nominal as with UK shares.
We all get an allowance that allows us to earn up to £2,000 a year in dividends before tax is due. You will have to include dividends from foreign shares in your self-assessment tax return and your foreign dividends will eat into your dividend allowance.
As with the personal savings allowance, the dividend allowance is not a deduction; instead, a zero rate of tax applies to the relevant income. Above this amount, dividends in the basic-rate tax band are subject to income tax at 7.5%, 32.5% at the higher rate, and 38.1% at the additional rate.
You can usually claim Foreign Tax Credit Relief when you report your overseas income in your tax return. You can claim the smaller of the foreign tax paid or the UK tax due.
The dividend allowance means that you will not get any relief on the first £2,000 of your US dividends. On amounts above £2,000, you will be able to reclaim the UK tax suffered at 7.5%, effectively making it tax free in the UK and subject to 15% tax at the US rate. For a higher-rate taxpayer, you will have suffered UK tax at 32.5% and US tax at 15%. This means you can claim back the 15% tax on the portion of the dividend income that brings you into the higher-rate bracket.
What is Save As You Earn?
Save As You Earn (SAYE) is a workplace savings and shares scheme that’s offered by some employers. The scheme allows you to set aside up to £500 a month from your salary to put into savings for three or five years.
At the end of your savings contract you’ll receive a tax-free bonus and can choose to either take your savings and bonus as cash or to buy shares in your company with the money. The price you pay for the shares will have been fixed when you joined the scheme – so if your company has done well over the years you’ve been saving, you could get a bargain share purchase.