Do I Get Taxed On US Dividends – Withholding Tax and How To Avoid It

Do I Get Taxed On US Dividends – Withholding Tax

Many new investors are a little shocked in the UK when they get their first dividend payment from a US source in their ISA or General Investing account. Not because of the fluctuations in the USD to GBP exchange rate…

We are hit with a withholding tax in the UK on the dividends from US stocks. Currently, this tax is 15% although it can be as high as 30%.

To make sure you are ‘only’ getting taxed at a lower rate of 15% you must fill in a W-8BEN form. My broker Trading 212 made me fill one in when I opened the account.

If you have not filled one in, make it your priority to do so.

Getting hit with a 15% tax is bad enough, do not make the same mistake many do and continue getting hit with a 30% tax.

The W-8BEN is a very simple form to fill out and requires no knowledge of taxation or anything. Simply tick a few boxes and you are away. Hopefully, your broker will force you to fill one in as Trading 212 does.

Fortunately, the form can be filled out digitally at least if your broker makes you will one out.

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Dividend Tax Inside An ISA

Do I still get taxed 15% inside my stocks and shares ISA is normally the next question…

Yes, on US stock you will always be taxed on the dividends. On your UK stocks fear not your ISA is tax-free for both capital gains and dividends.

To see why you should have a stocks and shares ISA check out Trading 212 Invest vs ISA.

However, do not let the 15% tax put you off investing in the US economy, it will be your downfall if you do. Even more so if you choose to adopt a dividend growth portfolio strategy like me.

Many UK companies are not as committed to dividend payments in the same way that US companies are. The criteria are different for dividend kings and aristocrats in the UK vs the US, in that they are nowhere near as strict. I shall do a separate post for US vs UK aristocrats.

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How To Avoid Withholding Tax On Dividends

Here is a little know fact, or at least it seems that way.

There is a way for UK investors to avoid paying the withholding tax.

There is a slight catch.

If you hold your investments in a SIPP. Then you do not have to pay the 15% withholding tax. Now of course the downside is your money is locked away until at 55/57 depending on when you were born.

I only recently discovered this and so thought I would update this post.

For me, it’s a tough one. I want to retire long before 57 (the age when I would be able to draw from a SIPP). However, I have opened a SIPP account with Hargreaves Landsdown.

I’ll likely just send some of the higher-yielding ones over to the SIPP and move other stocks over as I age closer to 57.

Remarkably you can contribute to a SIPP until age 75 currently. So it makes sense to move other stocks over to get to bonus applied as you age.

If you do not plan on retiring until 57 + anyway then you may as well put it all in the SIPP. The downside is it’s locked away. At least with the ISA, I can cash out tomorrow if I choose.

Example Of No Withholding Tax

My current thoughts are to move over a couple of the bigger US dividend-paying stocks to the SIPP such as AT&T.

As an example I currently have 112 shares of AT&T ticker symbol T.

Currently, they pay $0.52 per share per quarter equating to $58.24 or £42.15 at the current exchange rate.

However, thanks to 15% withholding tax it looks like this for me inside my Trading 212 ISA

$0.52 minus the 15% tax is $0.44 per share per quarter.

Giving me $49.28 per dividend or £35.67 in my account.

That is a difference of £6.48 for every dividend or quarter and guess what, it will only get worse, much worse.

Here is another downside for the SIPP – Hargreaves Landsdown has a platform fee of 0.45% along with a 1% or £1 minimum on dividend reinvestment.

Still compared to the 15% tax this is a good deal. Do not forget the 20% bonus you get back as well (this will offset the platform fees anyway) – although it is taxed on the way out above your personal allowance.

Personally, I think I will move just a couple of the big payers over. There is a charge of £11.95 per deal for Shares inside the SIPP (funds are free).

To make it worth while I would obviously be buying decent amounts in one go.

Plently to think about.

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None of the above should be used as financial advice, I am not a professional. Always do your own research.

Thanks,

Sean