Investment Income Taxation

• Topic 01

  Investment Income Taxation

  28 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is the dividend income tax rate for a higher-rate taxpayer in 2025/26?

   • A
     33.75%
     Correct answer
   • B
     40%
   • C
     25%
   • D
     32.5%
   Explanation

   Dividend income in the higher-rate band is taxed at 33.75% in 2025/26. This applies to dividend income that, when stacked last after non-savings and savings income, falls above the basic-rate band threshold of £37,700 of taxable income. The 33.75% rate is lower than the 40% higher rate for non-savings income, reflecting the corporation tax already paid on the underlying profits.

2. What is the dividend income tax rate for a basic-rate taxpayer in 2025/26?

   • A
     0%
   • B
     33.75%
   • C
     8.75%
     Correct answer
   • D
     7.5%
   Explanation

   Dividend income falling within the basic-rate band is taxed at 8.75% in 2025/26, after the £500 Dividend Allowance is applied at 0%. This rate is significantly lower than the 20% basic rate for non-savings income, reflecting the fact that dividends are paid from company profits already subject to corporation tax. The dividend rates are 8.75% (basic), 33.75% (higher), and 39.35% (additional).

3. A taxpayer receives £800 in dividends in 2025/26. They are a basic-rate taxpayer. Does the Dividend Allowance remove this income from their tax band, and what tax is payable?

   • A
     No — the full £800 is taxed at 20% basic rate because dividends and savings income are treated the same
   • B
     No — the £800 still occupies the basic-rate band; the first £500 is taxed at 0% (Dividend Allowance); the remaining £300 is taxed at 8.75% = £26.25
     Correct answer
   • C
     No — the full £800 is taxed at 8.75% because the Dividend Allowance only applies to higher-rate taxpayers
   • D
     Yes — since £800 is less than £1,000, the entire dividend is removed from income and no tax or band position is affected
   Explanation

   A key principle: the Dividend Allowance does not remove dividend income from the tax band. The income still occupies the band and contributes to determining whether other income falls in the basic-rate or higher-rate band. First £500 is taxed at 0%; the remaining £300 is taxed at 8.75% = £26.25. Total tax on dividends = £26.25.