The new Dividend Tax

April 8th, 2016  |  Published in Uncategorized

Clients who are currently being paid through a Limited Company now have to consider the Dividend Tax introduced on 5th April 2016.

The dividend tax comes into effect on 6 April 2016, and applies to all dividends the 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.

Although the basic rate, 7.5% sounds low, this is tax on money withdrawn from your Limited company, which has already paid 20% Corporation Tax on its profits. Once you have used your £5,000 allowance then, in effect you are paying 27.5%. There is no longer the clear advantage of not having to pay National Insurance on much of the income taken via a company, which I’m sure is the point, although our PR minded Chancellor sold it on the ‘tax free allowance’ angle, fooling probably noone.

Under Self Assessment this additional tax would 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 PAYE coding notice say: “this is to collect the basic rate of tax due on your dividend income.” The 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.

 

 

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