I am worried about the recent changes to the Finance Bill as regards dividends. I am a small shareholder and pay no income tax at the moment. What will be the situation as regards this withholding tax? Can I use my tax free allowance to claim this money back?
Mr L.G., Dublin
The situation with share dividends seems to change annually. Up to this April, investors have had to deal with tax credits; now they are facing withholding tax. Indeed, it is somewhat ironic that at a time when the Government is seeking to introduce tax credits more generally into the tax system in the interest of fairness and equality, they are phasing them out in relation to dividends. However, it has to be said that the system of credits applicable to shares was particularly cumbersome.
To understand how the system does and will work, let us take the example of CRH, one of the Republic's largest companies which reported annual results earlier this month. For the ordinary person in the street the position is further complicated in that all Irish stocks are now quoted in euros on the Irish Stock Exchange and many, including CRH, produce their accounts in euros, even though most of us have only an academic interest in the new currency and are still firmly wedded to the pound.
As it happens, because of the change in the way dividends are being taxed, CRH like many companies paid a second interim dividend this year rather than a final dividend. For our purposes, we can refer to this as the final dividend for the 1998 financial year.
The net final dividend was 17.14 cents (13.5p) per share. Let us assume our investor has 500 shares in the building materials group. That would give a total net final dividend of €85.70 (£67.49). As with all income, this is tax able in the Republic for those who are both resident and domiciled here - i.e. most of us. However, the company has already paid some tax on your behalf - 11/89th of the net dividend to be precise. This is called a tax credit. for our investor, that 11/89ths comes to €10.59 (£8.34). Adding this to the net dividend would give the total gross dividend - €96.29 (£75.83).
The amount of tax payable under this system depends on the top rate at which one pays tax. If you pay tax at 24 per cent in the current year, your tax bill would be €23.11 (£18.20). Of course, the Revenue has already taken €10.59 (£8.34) by way of tax credit so the outstanding amount owed to the taxman would be €12.52 (£9.86). The formula to work the figure out for any other share is: gross dividend [X] 24 per cent - tax credit = tax bill.
If our investor's marginal or top rate of tax was 46 per cent, the relevant tax bill would be €44.29 (£34.88) less the tax credit of €10.59 (£8.34) leaving a balance owing to the Revenue of €33.70 (£26.54) in this instance.
Of course, if like Mr L.G., you do not pay income tax, the tax credit would be refundable from the Revenue Commissioners.
The new system simplifies the process somewhat. Basically what happens is that the company now has to withhold tax at the standard rate - 24 per cent - on behalf of the Revenue. This gives the name - withholding tax - to the deduction from the gross dividend.
For those people whose top rate of tax is the standard 24 per cent rate, this effectively removes the need to calculate and pay the balance of any tax due on share dividends. People who pay tax at the higher 46 per cent rate will still have to send the balance - 22 per cent of the gross dividend - to the taxman.
The good news for shareholders like Mr L.G., who do not currently pay any income tax, is that, although the company will still have to withhold 24 per cent of the gross dividend per share, this money will be refundable.
Savings Certs
The leaflet I have on UK savings certificates (tax-free) says that people who live abroad can buy them "if local regulations allow it". Do regulations here allow it, and what are the tax implications? I am a PAYE worker.
Ms R.H., Dublin
There is absolutely no problem with people in the Republic purchasing British savings certificates. However, it is unlikely they would be allowed to benefit from the tax-free element which makes them attractive, or at least did before the present low rates took much of the sheen of this investment product.
As a general rule, if you are Irish and resident in Ireland, you will be expected to pay tax on income you earn anywhere in the world, including on British or other foreign investments. Indeed, even if you are resident but not domiciled here, you are still liable to pay tax on British income, including investment income.
There is a double taxation agreement in force between the two countries but this is designed to ensure that you do not get taxed twice on the same income, not necessarily to protect income which would be tax-free in Britain from being liable to tax in the Republic.
A further point to remember is that, with Britain still outside the European single currency, there is still the awkward question on currency fluctuation in relation to any investment you may make in Britain - to say nothing of the exchange rates you would be charged by the banks here and in Britain in the course of the transaction.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, Fleet Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
