Dividend tax is the tax an individual pays on income received from company shares. Because dividends are paid out of a company's after-tax profit, this is effectively a second layer of tax on the same earnings, following the corporation tax already paid by the business.
Rates and reliefs vary widely. The United Kingdom gives a small tax-free dividend allowance and then taxes the rest at rates that rise with your income band. The United States splits dividends into qualified ones taxed at lower capital-gains rates and ordinary ones taxed as regular income. Germany applies a flat Abgeltungsteuer of around 25 percent plus solidarity surcharge, while Italy uses a flat 26 percent on most dividends.
Example: a UK company director draws 30,000 pounds in dividends; after the allowance, the balance is taxed at the dividend rate for their band, on top of the corporation tax the limited company already paid.
This double layer is exactly what a US S corporation avoids and a C corporation accepts. Owners often balance salary against dividends to lower their total bill; try the numbers in our UK limited company tax calculator.