Advanced Taxation (UK) · Corporation tax: taxable total profits

Dividends and Distributions Received by Companies for ACCA ATX

Updated 11 October 2026 · Fact-checked

Dividends a UK company receives from other companies are normally exempt from corporation tax, so they are left out of taxable total profits. They are added to taxable total profits to give augmented profits, which decide the corporation tax rate and marginal relief. Individuals are different: they pay tax on dividends after the nil rate band.

Understand Dividends and Distributions Received by Companies

A company that receives a dividend from another company is not taxed on it in the normal case. The profits have already borne corporation tax in the paying company, so the law exempts most distributions to avoid double tax. In the exam you simply leave the dividend out of taxable total profits.

The dividend does not disappear, though. Augmented profits are taxable total profits plus exempt distributions received from non-group companies. Augmented profits are what you compare with the lower limit of £50,000 and the upper limit of £250,000 (for a 12-month period) to decide between the small profits rate of 19%, the main rate of 25%, and marginal relief.

Dividends from companies in the same 51% group are not added to augmented profits. They are exempt and also ignored for the limits. Dividends from a company that is not in the group do count. Dividends the company itself pays are not deductible and are not part of this topic.

Contrast this with an individual. A person is taxed on dividends in the income tax computation. The first £500 is covered by the dividend nil rate band. The rest is taxed at 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band. Dividends are the top slice of income. A company has no nil rate band and no personal allowance.

The exam tests this by giving a company with trading profit, a gain and a dividend, then asking for the corporation tax liability. The trap is to tax the dividend or to forget it in augmented profits. Marginal relief only applies where augmented profits fall between the limits, and the limits are cut down by associated companies and short periods.

Key rules to remember

Taxable total profits: Taxable total profits = trading profit + property income + interest + chargeable gains − reliefs, excluding dividends received; Exempt dividends from UK and overseas companies are not included. Deduct qualifying charitable donations as normal.
Augmented profits: Augmented profits = taxable total profits + exempt distributions received from non-group companies; Distributions from 51% group companies are excluded from augmented profits.
Rate test: Augmented profits ≤ £50,000: 19%. Augmented profits ≥ £250,000: 25%. In between: 25% less marginal relief; Limits are for a 12-month period with no associated companies. Divide by 1 plus the number of associated companies, and time-apportion for short periods.
Marginal relief: (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; This is the formula in the tax tables. Deduct the relief from tax at 25% on taxable total profits.
Individual dividend rates: Nil rate band £500; then 8.75% basic, 33.75% higher, 39.35% additional; Dividends are taxed as the top slice of income. The nil rate band still uses up part of the band.

How to solve Dividends and Distributions Received by Companies questions

Use this order for any question where a company receives dividends.

1Identify who receives the dividend. If it is a company, it is exempt from corporation tax. If it is an individual, go to the income tax computation.
2Check the payer. If the payer is in the same 51% group, the dividend is ignored for augmented profits. If not, it counts.
3Compute taxable total profits without the dividend: trading profit, property income, interest, gains, less charitable donations and reliefs.
4Compute augmented profits by adding the non-group dividends received to taxable total profits.
5Adjust the limits for the length of the accounting period and for associated companies.
6Compare augmented profits with the adjusted limits and choose 19%, 25% or marginal relief.
7Compute tax on taxable total profits only. Apply marginal relief using augmented profits in the formula.
8State the result and, if asked, comment on what a different payer, such as an individual shareholder, would pay.

Quickest way: Dividend in or out in two checks

When to use it: Use when the question gives a mixed list of income for a company and you must reach the corporation tax quickly.

Write taxable total profits first and leave all dividends out. Ring any dividend from a group company as ignored.
Write a one-line augmented profits figure: taxable total profits plus non-group dividends.
Test it against £50,000 and £250,000 after adjusting for associates and period length.
Apply the rate to taxable total profits only. If marginal relief applies, use the formula straight from the tax tables.

Common mistakes in Dividends and Distributions Received by Companies

Taxing the dividend in the corporation tax computation.
Students carry over the income tax rule that dividends are taxable.
Fix: For companies, dividends from other companies are exempt. Leave them out of taxable total profits.
Ignoring the dividend completely, so augmented profits equal taxable total profits.
Students stop once they see that the dividend is exempt.
Fix: Always add non-group dividends to taxable total profits to reach augmented profits before checking the limits.
Adding dividends from a 51% group company to augmented profits.
Students do not read the shareholding information in the scenario.
Fix: Check group status. Group dividends are excluded from augmented profits.
Applying the corporation tax rate to augmented profits.
Students think augmented profits is the tax base.
Fix: The tax base is taxable total profits. Augmented profits only decide the rate and marginal relief.
Applying the £500 dividend nil rate band to a company.
Students mix up individual and company dividend rules.
Fix: The nil rate band and the 8.75%, 33.75% and 39.35% rates are for individuals only. Companies have no nil rate band.
Using the full £50,000 and £250,000 limits when there are associated companies or a short period.
Students focus on the dividend and skip the limit adjustment.
Fix: Divide the limits by 1 plus the number of associated companies and time-apportion for short periods before comparing.

Worked examples

Example 1

Alpha Ltd (no associated companies) has a 12-month period to 31 March 2026. It has trading profit of £180,000 and receives a dividend of £27,000 from an unconnected UK company. Compute the corporation tax liability.

Show the solution

Taxable total profits = £180,000. The dividend is exempt and left out.
Augmented profits = £180,000 + £27,000 = £207,000.
The limits are £50,000 and £250,000. Augmented profits of £207,000 lie between them, so marginal relief applies.
Tax at 25% on £180,000 = £45,000.
Marginal relief = (£250,000 − £207,000) × 3/200 × £180,000 ÷ £207,000 = £43,000 × 0.015 × 0.869565 = £645 × 0.869565 = £560.87, so £561 to the nearest pound.
Corporation tax = £45,000 − £561 = £44,439.

Answer: Corporation tax liability is £44,439, using taxable total profits of £180,000 and augmented profits of £207,000.

Example 2

Beta Ltd has a 12-month period with no associated companies. It has trading profit of £230,000 and receives a dividend of £40,000 from a 75%-owned subsidiary and £25,000 from a 5% shareholding in an unconnected company. Explain the treatment and compute the corporation tax liability.

Show the solution

Both dividends are exempt, so taxable total profits = £230,000.
The subsidiary is in the same 51% group, so its £40,000 dividend is ignored for augmented profits.
The £25,000 from the unconnected company is added. Augmented profits = £230,000 + £25,000 = £255,000.
Augmented profits of £255,000 exceed £250,000, so the main rate of 25% applies with no marginal relief.
Corporation tax = £230,000 × 25% = £57,500.

Answer: Corporation tax liability is £57,500. The group dividend is ignored, and the non-group dividend pushes augmented profits above the upper limit.

Exam tips

Show augmented profits as a separate working. Marks are given for adding the non-group dividend even if later figures are wrong.
State the reason in a few words: exempt distribution, or group dividend ignored. Written explanations earn professional skills marks too.
Read the shareholding details. They tell you whether the payer is in the same 51% group.
When asked to compare with an individual, use the £500 dividend nil rate band and the rates from the tax tables, and say that the dividend is the top slice of income.
Always check for associated companies and short periods before using the £50,000 and £250,000 limits.

Practice questions from Corporation tax: taxable total profits

Dividends and Distributions Received by Companies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dividends and Distributions Received by Companies: frequently asked questions

Are dividends taxable for UK companies?

Dividends received by a UK company from other companies are normally exempt from corporation tax. They are left out of taxable total profits. They can still raise augmented profits, which affects the rate.

Why are dividends added to augmented profits?

The £50,000 and £250,000 limits are tested against augmented profits. Adding non-group dividends stops a company with large dividend income from claiming the small profits rate. Only taxable total profits are charged to tax.

Are dividends from a subsidiary included in augmented profits?

No. Dividends from a 51% group company are ignored for augmented profits. Only dividends from non-group companies are added.

How is company dividend treatment different from an individual's?

A company does not pay tax on dividends received. An individual pays tax after a £500 dividend nil rate band, at 8.75%, 33.75% or 39.35% depending on the band the dividend falls in.