Company dividends and taxes in the UK

Journal article

A study investigated the effect of the higher tax cost of paying dividends for firms in the surplus advance corporation tax (ACT) position. If taxes do have a significant influence on dividend choices, then it would not be unreasonable to expect a firm moving into a surplus ACT position to increase its dividends by less than it might otherwise have done, and a firm moving out of a surplus ACT position to increase its dividends by more than it would otherwise have done. The study was based on annual company account information for a sample of 1,218 quoted UK industrial and commercial firms over the period 1970-1990. It was found that the higher tax cost of paying dividends for firms with surplus ACT does put downward pressure on the level of their dividend payments. Therefore the hypothesis that taxes have no effect on company dividends is rejected. Although the estimates of the size of this effect were very tentative, they do cast some doubt on the very large tax effects that have been suggested by some aggregate time-series studies.

Authors: Devereux, M; Bond, S; Chennells, L

• Publication date: 1995-01-01