The new dividend tax comes into effect on 6 April 2016, and applies to all dividends an individual receives in excess of £5,000 per tax year.
The average company director, who takes a modest salary within his personal
allowance, and the rest of his income from the company as dividends, will pay more tax in 2016/17 than he did in 2015/16.
Under self-assessment this additional tax would normally be payable by 31 January 2018, as the balancing payment for that tax year. However, HMRC doesn’t want to wait that long for the extra tax, so it has amended the tax codes of many owner/directors to “code
out” an estimated amount, which is approximate to the dividend tax due for the year.
The deduction in the PAYE code is labelled ‘dividend tax’, and the notes on the P2 (PAYE coding notice) say: “this is to collect the basic rate of tax due on your dividend income.” The P2 notes for a higher rate taxpayer refer to higher rate tax.
However, dividends won’t be taxed at the basic rate of tax (20%) in 2016/17. The dividend tax is charged at 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and at 38.1% for an additional rate taxpayer. You can see how the taxpayer will be confused.
To work out whether the deduction for “dividend tax” is approximately correct
you need to estimate your total income tax liability for 2016/17 or - more likely - ask your accountant to do it for you!
You can find a worked example for a fictional taxpayer at http://guilfordaccounting.co.uk/taxtips where you can also read all about the new
dividend tax rules and sign up to get our Tax Tips Newsletter.
This, of course, is just HMRC changing the rules to suit itself and so you can object to having dividend income or interest included in your PAYE code.To get your PAYE code changed
you can ring HMRC (best of luck with that!), or complete the online form.
Noel Guilford