When can UK public revenue dividends be paid without deduction of income tax?

Under section 893 of the Income Tax Act 2007, UK public revenue dividends can be paid gross when the payment is interest on gross-paying government securities and no deduction at source application is in effect for those securities at the time of payment. Both conditions must be satisfied simultaneously.

What are gross-paying government securities under section 893?

Gross-paying government securities comprise three categories: gilt-edged securities (gilts), securities issued or treated as issued under the National Loans Act 1939 or the National Loans Act 1968 that are not gilts, and any other securities that the Treasury has specifically directed should be treated as gross-paying government securities under section 894(3).

What is a deduction at source application and how does it affect gross payment of gilts?

A deduction at source application is a mechanism under section 895 by which a holder of gross-paying government securities can request that income tax be withheld from interest payments. If such an application is in effect at the time of payment, the gross payment exception under section 893 does not apply and tax must be deducted.

Do holders of gilts still need to declare gross interest on their tax return?

Yes. Although gilt interest is paid gross without income tax deducted at source under section 893, the recipient must still declare the income on their self-assessment tax return and pay any tax due. The gross payment simply removes the need for repayment claims by exempt or lower-rate taxpayers.

Income Tax Act 2007 section 893

Payments of UK public revenue dividends which are payable gross

Section 893 sets out the circumstances in which UK public revenue dividends can be paid without deduction of income tax at source, providing an exception to the general duty to deduct tax from such payments.

Interest on gross-paying government securities can be paid without tax deducted, provided no application for deduction at source is in effect for those securities.
Gross-paying government securities include gilt-edged securities (gilts) and certain securities issued under the National Loans Act 1939 or the National Loans Act 1968.
Securities that are the subject of a specific Treasury direction also qualify as gross-paying government securities.
If a deduction at source application is in effect at the time of payment, the exemption does not apply and tax must be deducted in the normal way.

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