What is changing?

This change, announced in the 2025 Budget, belatedly aligns the tax treatment of non-UK residents with that of UK residents, who saw the abolition of the dividend tax credit for UK residents in 2016. The measure will affect the small number of non-UK resident individuals who receive both UK dividend income and UK rental or partnership income.

Current position

Under the current rules, non-UK residents who receive UK dividend income and UK rental or partnership income can choose to be taxed under one of two alternative methods:

1. The individual's entire UK income is taxable, but they may claim the UK Personal Allowance, and UK dividends are granted a notional tax credit at the ordinary rate, currently 8.75%, OR
   
2. Only UK rental or partnership income is taxable, dividend income is disregarded, but the Personal Allowance cannot be claimed. However, the notional tax credit can be used to reduce the tax payable on the UK rental income or partnership income even though the dividend is disregarded.

The taxpayer can choose the route which is most advantageous to them.

The new rules from 6 April 2026

From 6 April 2026, the means of calculating the tax liability will remain the same but non-UK residents will no longer be able to claim the 8.75% notional tax credit on UK dividends received. This brings the treatment of non-UK residents into line with UK residents, who have not been able to claim such a credit since 2016.

Example

Hans is a non-UK resident and receives £10,000 in UK dividends and £10,000 in UK rental income.

Pre 2026:

Under method (1) Hans’s income is £20,000. After deducting his personal allowance this leaves £7,430 dividend taxable. The first £500 is taxed at 0% and the balance at 8.75%. The tax liability is £606.37 less the notional tax credit of £875, reducing the liability to nil. No repayment is available as the tax credit is notional, i.e. not real.

Under method (2) the dividend is ignored (disregarded), and no personal allowance is given. The rental income is taxed at 20%, so tax of £2,000 but the 8.75% notional credit (£875) reduces the tax due on the rental income to £1,125. As method (1) gives the lowest tax liability (nil) Hans would choose this method of calculating his UK tax liability.

Post 2006:

The same calculations are performed as before but there is no notional tax credit relief on the £10,000 dividend so the £875 notional credit is lost. This increases the tax due under method (1) to £606.37, and under method (2) to £2,000. Again, Hans would choose method (1) but his tax liability on the same income increases from nil to £606.37.

Summary

From 6 April 2026, non-UK resident individuals who receive UK dividend income and UK rental or partnership income will no longer be entitled to a notional tax credit on their UK dividends and will see a potentially significant increase in their UK tax liability from 6 April 2026. Those non-UK resident taxpayers affected by this change need to be aware of the change now to plan accordingly.