What Is Franked Investment Income? The UK Tax Term Explained

Franked investment income (FII) is an old UK tax term for dividends a company received from another UK company. The phrase was removed from the Corporation Tax Acts in 2016, but the idea behind it still helps decide which corporation tax rate a company pays, and whether it must pay its tax in instalments.

What did franked investment income mean?

From 1973 to 1999 the UK ran an imputation system. When a UK company paid a dividend, it also paid advance corporation tax (ACT), and the shareholder received a tax credit for that tax. The dividend came 'franked', carrying credit for tax already paid.

When the shareholder was another UK company, the dividend plus its tax credit was that company's franked investment income. It paid no corporation tax on it, because the profits behind it had already been taxed, and it could use its FII to frank (cover) the ACT due on dividends it paid to its own shareholders. The principle was that profit taxed once could pass through any number of companies without a further charge.

Does franked investment income still exist?

Not as a legal term. ACT was abolished for dividends paid on or after 6 April 1999. The tax credit lingered at a notional 10% until 6 April 2016, when it was abolished and the Dividend Allowance, now £500, took its place. With the credit gone, the Finance Act 2016 removed franked investment income from the corporation tax rules. The legislation now refers to exempt ABGH distributions: dividends and similar distributions (named after paragraphs A, B, G and H of section 1000 of the Corporation Tax Act 2010) that are exempt from corporation tax. The company tax return still has a box headed 'Franked investment income/Exempt ABGH distributions'.

A last piece of the old system went recently. Some companies still carried surplus ACT from before 1999, usable only under restrictive 'shadow ACT' rules. Those rules were repealed for accounting periods ending on or after 1 April 2026.

Why do dividends received still matter for corporation tax?

Most dividends a company receives are exempt from corporation tax. They still count when the law measures how large its profits are.

Since 1 April 2023, the rate depends on augmented profits, defined in section 18L of the Corporation Tax Act 2010 (Part 3A, inserted by the Finance Act 2021): taxable total profits plus the exempt distributions the company receives. Augmented profits of £50,000 or less mean the 19% small profits rate. Above £250,000, the 25% main rate applies. In between, taxable profits are charged at 25% less marginal relief. Both limits are divided by one plus the number of associated companies, and reduced for accounting periods shorter than 12 months. The test is not new: until 31 March 2015 the old small profits rate added franked investment income in the same way, and from then until 31 March 2023 most companies paid a single rate.

Not every dividend is added. A dividend is left out if it comes from one of the company's own 51% subsidiaries, or from a fellow 51% subsidiary of a company above it in the group. Certain dividends from consortium-owned trading companies are left out too.

The same idea decides whether a company is large for quarterly instalment payments: profits plus dividends from outside the group, above £1.5 million divided by one plus the number of associated companies. A company in its first year over that line normally escapes instalments unless its profits exceed £10 million. So dividend income that is itself tax-free can still bring a company's tax payments forward.

How can dividend income change a company's tax rate?

Take a UK trading company with no associated companies and a 12-month accounting period. Its taxable profit is £40,000.

With no dividends, its augmented profits are £40,000, below the £50,000 lower limit, so it pays 19%: £7,600.

Now suppose it also receives £20,000 of dividends from a small shareholding in an unconnected listed company. The dividends are exempt, but augmented profits become £60,000, above the lower limit. Tax is now 25% of £40,000 (£10,000), less marginal relief of 3/200 × (£250,000 minus £60,000) × £40,000/£60,000, which is £1,900. The bill is £8,100.

The dividends were not taxed, yet the tax on the same trading profit rose by £500, an effective rate of 20.25% instead of 19%.

One exception to all of this: a close investment-holding company, broadly a close company that exists mainly to hold investments rather than to trade or to let property to unconnected people, cannot use the small profits rate or marginal relief, and pays 25% however small its profits.

How this plays out for a particular company depends on its group, its shareholdings and its accounting periods, and an accountant can advise on its circumstances.