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Dividends are separated from other income because they are taxed at a special rate of tax. Up until 1998-99 dividends were taxed with interest at the 'savings' rate. From 1999-2000 onwards they are taxed at a 'dividends' rate.
Most of the dividends taxed at the savings or dividends rate are located in the dividends section on the income menu. The following income, entered elsewhere is included with the dividend income rate:
Foreign savings (dividends)
Dividend income from a trust fund, settlement or estate,
Dividends from a PEP.
Dividends on ordinary shares in Venture Capital Trusts (provided that less than £100,000 shares are purchased in the year)
Dividends are taxed at source. This is called a tax credit. Some tax credits are non-refundable:
Stock dividends.
Foreign income dividends (do not exist after 1998-99)
All dividends from 1999-2000 onwards.
Dividends are taxed at 20% up to and including 1998-99 and at 10% from 1999-2000 onwards. There will be no further liability to tax unless the taxpayer is a higher rate taxpayer. From 1999-2000 onwards the higher rate tax on dividends is 32.5%. 'From 2010/2011 an additional higher rate on dividends will apply at 42.5% for taxable income above £150,000.
To compute the tax on dividends, the dividend income is treated as the highest part of a person's income with the exceptions of life assurance gains and lump sums from termination of employment.