ACCA Advanced Taxation (ATX) Practice Exam

Are dividends liable to national insurance contributions?

1. Yes, they are subject to national insurance

2. No, they are not liable to national insurance

3. Only if the amount exceeds a certain limit

4. Only for higher rate taxpayers

The correct answer is: No, they are not liable to national insurance

Dividends are not liable to national insurance contributions because they are treated differently from wages or salaries in terms of taxation. National insurance contributions are generally applicable to earnings from employment and self-employment, which fund various social security benefits. However, dividends are distributions of profits from a corporation to its shareholders and are taxed under a separate regime that does not engage national insurance. The rationale behind this is rooted in the nature of dividends as a return on investment, rather than compensation for personal services. Since they arise from capital and not from employment, they do not attract national insurance contributions. This distinction is essential for tax planning and clarifies why shareholders receiving dividends do not encounter these additional costs. Other options misrepresent the tax treatment of dividends by suggesting scenarios where national insurance might apply, which does not align with current tax regulations. Hence, understanding the specific nature of dividends and their classification helps clarify the absence of national insurance obligations associated with them.