Does a company pay Corporation Tax on dividends it receives?

In short: Usually not. Most dividends a UK company receives are exempt from Corporation Tax: HMRC says the rules are designed so that "the great majority" of dividends are exempt (HMRC manual INTM651020). But exempt dividends from companies outside the company's 51% group still count towards "augmented profits", which decide whether the small profits rate or marginal relief applies. Taxley prepares and files the Company Tax Return (CT600) for £49.95 with micro-entity accounts, adds those dividends to augmented profits in box 620, then files the accounts at Companies House once the return is paid and finished.

Take the 30-second check to see whether Taxley fits your company, or read our guide to Corporation Tax rates and marginal relief.

Key facts (checked on 4 October 2026)

Does a company pay Corporation Tax on dividends it receives?

Only on dividends that aren't exempt. The charge to Corporation Tax on income applies to a dividend or other distribution a company receives, but only if the distribution is not exempt (CTA 2009 s.931A). The exemptions sit in Part 9A of the Corporation Tax Act 2009, with one set of rules for small companies and another for every other company.

Most ordinary dividends a company receives are exempt, so they stay out of taxable total profits and carry no Corporation Tax of their own. HMRC's manual says Part 9A is designed so that the great majority of dividends and other distributions are exempt (HMRC manual INTM651020). Two points still catch out holding and investment companies. An exempt dividend can raise the tax on the company's other profits, because the limits for the small profits rate and marginal relief are tested on augmented profits, which include exempt dividends from companies outside the group (CTA 2010 s.18L). And a dividend that fails the exemption conditions, usually one from an overseas company, is taxed as income, often with credit for foreign tax withheld. The sections below cover both, with a worked example.

Which dividends are exempt for a small company?

A small company's dividend is exempt when four conditions are met: the payer is resident only in the UK or a qualifying territory, the payment isn't interest the tax rules treat as a distribution, no foreign resident gets a tax deduction for it, and it isn't part of a tax advantage scheme (CTA 2009 s.931B).

"Small" here isn't the Companies Act size test used for accounts. A company is small for the dividend rules if it is a micro or small enterprise under the European Commission's 2003 recommendation: fewer than 50 staff, and turnover or a balance sheet total of no more than €10 million (HMRC manual INTM652060). The balance sheet total means gross assets, not net assets, and the figures of partner and linked enterprises are added in, so a company in a larger group can fail the test even when its own accounts are small. Open-ended investment companies, authorised unit trusts, insurance companies and friendly societies are never small for these rules (CTA 2009 s.931S). An ordinary dividend from a company resident only in the UK usually passes all four conditions.

How does the exemption work for a company that isn't small?

A company that isn't small gets the exemption when the dividend falls into an exempt class, isn't interest treated as a distribution, and gives no foreign resident a tax deduction (HMRC manual INTM653010). Falling into one class is enough, unless an anti-avoidance rule takes the dividend out of it.

There are five exempt classes: distributions from controlled companies, distributions on non-redeemable ordinary shares, distributions on portfolio holdings, distributions derived from transactions not designed to reduce tax, and dividends on shares accounted for as liabilities (HMRC manual INTM653020). A portfolio holding broadly means the recipient holds less than 10% of the payer's issued share capital, with matching 10% tests for rights to its profits and assets (CTA 2009 s.931G). Anti-avoidance rules in sections 931J to 931Q target schemes such as manipulating the controlled-company or portfolio rules. Each class has its own conditions, so check which class covers each holding before leaving a dividend out of taxable profits.

How can exempt dividends still increase a company's Corporation Tax?

Through augmented profits. The small profits rate and marginal relief depend on augmented profits: taxable total profits plus exempt dividends from companies outside the 51% group (CTA 2010 s.18L). GOV.UK says a company can't claim marginal relief if its profits, including distributions from unrelated, unassociated companies, go over £250,000 (GOV.UK: Marginal Relief).

The rate test uses augmented profits, but the tax is charged only on taxable total profits. A company gets the 19% small profits rate only if its augmented profits don't exceed the lower limit (CTA 2010 s.18A). Between the lower and upper limits it pays the main rate less marginal relief: the standard fraction × (upper limit − augmented profits) × (taxable total profits ÷ augmented profits) (CTA 2010 s.18B). For financial years 2023 to 2026 the limits are £50,000 and £250,000 and the fraction is 3/200 (HMRC: Corporation Tax rates and allowances). Both limits are reduced for a short accounting period and divided by one plus the number of associated companies (CTA 2010 s.18D).

Not every exempt distribution counts, and group dividends are left out. HMRC lists the qualifying kinds as dividends, distributions of assets, amounts treated as a distribution on a transfer of assets or liabilities, and bonus issues following a repayment of share capital (HMRC manual CTM03915). A distribution is excluded when the payer is a 51% subsidiary of the recipient, or of a company of which the recipient is itself a 51% subsidiary, or is a trading or relevant holding company that is a consortium quasi-subsidiary of the recipient (CTA 2010 s.18L). So a holding company's dividends from its own 51% trading subsidiary stay out of augmented profits, while dividends on listed shares, or on a minority stake in another private company, go in.

What does a worked example of dividends and marginal relief look like?

A small property company with £40,000 of taxable profit pays £7,600 without dividends. Add £20,000 of exempt dividends from a non-group company and it pays £8,100: augmented profits of £60,000 take it past the £50,000 lower limit, so it pays the main rate less marginal relief (GOV.UK: Corporation Tax rates).

Assumptions: a 12-month accounting period to 31 March 2026, all in financial year 2025; a company that mainly lets property to unconnected tenants, so not a close investment-holding company; small for the dividend rules; no associated companies unless stated.

In the middle column the dividends bear no tax, yet the bill rises by £500. Augmented profits of £60,000 sit between the limits, so the company pays 25% on its £40,000 of taxable profit, £10,000, less marginal relief of 3/200 × (£250,000 − £60,000) × (£40,000 ÷ £60,000) = £2,850 × 2/3 = £1,900 (CTA 2010 s.18B). That leaves £8,100, an effective rate of 20.25% instead of 19%. The rates, limits and 3/200 fraction for financial year 2025 come from HMRC's table (HMRC: Corporation Tax rates and allowances). The first £10,000 of dividends would cost nothing, because augmented profits of £50,000 don't exceed the lower limit; the whole £500 comes from the second £10,000.

The right-hand column shows that a group dividend doesn't escape the limits. A 51% subsidiary's dividend is excluded, so augmented profits stay at £40,000. But owning the greater part of another company's share capital gives control (CTA 2010 s.450), and a controlled company that carries on a trade or business is an associated company (CTA 2010 s.18E). With one associated company the limits are divided by 2, to £25,000 and £125,000 (GOV.UK: Marginal Relief). The £40,000 then falls inside the band: £10,000 less 3/200 × (£125,000 − £40,000) × (£40,000 ÷ £40,000) = £1,275, leaving £8,725. The extra tax comes from owning the subsidiary, not from its dividend. A subsidiary that carried on no trade or business in the period would be ignored, leaving the tax at £7,600 (CTA 2010 s.18E). Our guide to associated companies and the thresholds explains how to count them.

Where do dividends received go on the CT600?

Exempt dividends don't go in any income box. Exempt dividends from companies outside the group go in box 620, "Franked investment income or exempt ABGH distributions", which feeds the rate test only (HMRC: The Company Tax Return guide). Taxable dividends from non-UK companies go in box 180.

The name "franked investment income" survives on the CT600, but box 620 now holds the exempt dividends that feed augmented profits. HMRC's guide says the term franked investment income was repealed on 6 April 2016, and asks for exempt ABGH distributions: those that count as distributions only because they fall within paragraph A, B, G or H of section 1000(1) of the Corporation Tax Act 2010, and exempt under Part 9A. It also says to exclude exempt distributions from certain group or consortium companies under section 18L(3) (HMRC: The Company Tax Return guide). Box 180 is for non-exempt dividends or distributions from non-UK resident companies, with a detailed calculation in the computations (HMRC: box 180). Marginal relief itself goes in box 435.

How are overseas dividends and foreign tax treated?

A small company's overseas dividend is exempt only if the payer is resident in a qualifying territory, meaning a territory with UK double taxation arrangements that contain a non-discrimination provision (CTA 2009 s.931C). If it isn't exempt, the dividend is taxed in box 180, usually with credit for foreign tax withheld.

HMRC's list of qualifying treaties includes the USA, Ireland, Germany and France, and notes that Jersey and Guernsey are not qualifying territories, although their agreements contain a non-discrimination article, because "state" can't apply to a Crown Dependency (HMRC manual INTM412090). Some treaties also deny benefits to particular companies, such as international business companies of Antigua, Barbados and Jamaica, and their distributions aren't exempt for a small company (HMRC manual INTM652020). So a small company's dividend from a company resident only in Jersey is taxable, while one from a company resident only in the USA is usually exempt if the other conditions are met. A company that isn't small uses the exempt classes instead, and none of the three conditions for that exemption is about where the payer is resident.

A taxable foreign dividend is income in box 180, and foreign tax withheld on it can usually be credited against the UK Corporation Tax on that income (TIOPA 2010 s.18). The credit can't exceed the Corporation Tax attributable to that income, so foreign tax above that limit isn't credited (TIOPA 2010 s.42). The credit goes in box 450, "Double Taxation Relief", with a detailed calculation including any underlying tax relief claims (HMRC: box 450). Credit relief reduces the UK tax charged on the same income, so it has nothing to reduce on an exempt dividend: foreign tax withheld on an exempt dividend gets no relief in the UK return.

Does a holding or property company get the small profits rate at all?

Not if it is a close investment-holding company. Such a company pays the main rate on all its profits, with no small profits rate (CTA 2010 s.18A) or marginal relief (s.18B), so exempt dividends don't change its rate. A company that mainly lets property to unconnected tenants, or holds shares in trading subsidiaries it controls, isn't one.

A close company is one under the control of five or fewer participators, or of participators who are directors (CTA 2010 s.439). It isn't a close investment-holding company if it exists wholly or mainly for a permitted purpose, such as trading commercially, investing in land let commercially to people not connected with it, holding shares in or lending to companies it controls that trade or let commercially, or co-ordinating the administration of two or more such companies (CTA 2010 s.18N). A family company that mainly holds listed shares or cash usually has no permitted purpose, so it pays the 25% main rate whatever its augmented profits (GOV.UK: Corporation Tax rates). Our guide to Corporation Tax for a property rental company covers the letting side.

Can Taxley handle dividends received on the CT600?

Yes, for UK dividends and, within limits, a small company's overseas ones. Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House, keeps exempt dividends out of taxable profit, asks which came from outside your 51% group, and adds those to augmented profits in box 620.

In the Advanced editor, the profit and loss has a "Dividends received" line for the accounts figure, which isn't taxed from there. When the accounts show dividends not yet reflected in the tax figures, Taxley asks how much came from UK or overseas companies that are not in a 51% group with yours, with a one-click answer when none came from a 51% group company, and it doesn't take payment until you answer. The answer fills the "Franked investment income" field under Tax adjustments, which Taxley files in box 620 and adds to taxable total profits to give augmented profits. A property company, or a trading company with no sales but investment income, is also asked whether it is a close investment-holding company. Simple mode doesn't take dividends received, so those returns use the Advanced editor.

Overseas dividends go under Foreign income. Taxley asks whether the company is small for the dividend rules, checks the payer's country against HMRC's qualifying-territory list, and puts a taxable dividend in box 180, with credit for foreign tax limited to the UK tax on it. It doesn't file returns needing underlying tax relief, the rules for companies that aren't small, an election to tax a dividend, or a stake of 25% or more in an overseas company, and says so before you pay. The fee is £49.95 with micro-entity accounts, £139 with small-company accounts, or £39.95 for the CT600 alone with your own iXBRL accounts, which you file at Companies House yourself. Taxley's accounts go to Companies House once the return is paid and finished, using the company's 6-character authentication code. Take the 30-second check to see whether Taxley fits your company, or see pricing.

Frequently asked questions

Are dividends a company pays to its shareholders deductible?

No. No deduction is allowed for a dividend or other distribution when working out a company's profits for Corporation Tax (CTA 2009 s.1305). Our guide on why dividends aren't a Corporation Tax expense explains how to keep them out of costs.

Is a company that only receives dividends dormant?

Usually not. GOV.UK says a company is usually dormant for Corporation Tax if it has stopped trading and has no other income, for example investments (GOV.UK: Dormant for Corporation Tax). Dividends are investment income, even when they are exempt and no tax is due.

Can a company choose to have a dividend taxed?

Yes. The company receiving a distribution can elect for it not to be exempt, on or before the second anniversary of the end of the accounting period in which it was received (CTA 2009 s.931R). Taxley doesn't support this election.

Is franked investment income still a tax term?

No. HMRC says the term was repealed on 6 April 2016 and replaced with other definitions of dividends (HMRC: The Company Tax Return guide). It survives in the name of CT600 box 620, which now holds exempt ABGH distributions, and Taxley still uses it as a field name.

General information, not personalised tax or accounting advice.