Directors and shareholders of companies have no doubt been planning their financial affairs around the upcoming changes to the taxation of dividends. Unfortunately an HMRC policy may just make this all a little bit more complicated. If you’re the owner of a business, making use of the personal allowance through a small salary and taking the rest of your income through dividends, then you need to revisit your remuneration planning immediately.
HMRC changes to PAYE 2016/17 codes
The chances are (depending on your tax planning) that as a director you'll pay more tax on your dividends in 2016/17 than you did in 2015/16 due to the new dividend tax rate. The self assessment regime means this additional tax liability would usually be due for payment on 31 January 2018. This is known as the balancing payment for the tax year as part of payments on account.
Unfortunately this is where HMRC have complicated matters. With the government’s focus on reducing the annual deficit, HMRC aren’t looking to wait that long for any new additional revenue. Instead they’ve amended the tax codes for owners/directors to “code out”. This means an approximation is needed for the amount of dividend tax due for the year.
The deduction in the PAYE code is specifically labelled “dividend tax” with the notes stating that this is to collect, "the basic rate of tax" due from dividend income. Unfortunately that’s where things will get potentially confusing for you.
Dividends aren't taxed at the 20% basic rate of tax in 2016/17. The dividend tax rates can be seen in the table below. So to understand what your dividend tax may be, you’ll need to estimate your total income tax liability for the next tax year. No easy feat. Higher rate tax payers are told to refer to the higher rate tax.
This is all just yet another example of how taxing taxation can be. It highlights that unless you know exactly what you’re doing; you can easily end up making unintentional errors and so either pay too much or end up accidentally avoiding tax. Also, be aware that your advisor doesn't get a copy of your tax coding notice so make sure that this is forwarded on for review to see if it's correct.
If you’re looking to plan efficiently for the new dividend tax rates or require help with estimating your liability for the tax year ahead as part of this, then be sure to get in touch with a professional advisor. It could save you a lot of time, money and hassle.
The content of this post is up to date and relevant as at 26/02/2016.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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