Impatient HMRC to collect dividend tax early

Many company directors will soon be receiving PAYE coding notices for 2016/17, meaning the tax due on dividends drawn will be collected through PAYE.

The rules on dividends are set to change from 6th April 2016. Up to now as a company director you could take your personal allowance plus just over £31,000 in dividends before being taxed. This has now been reduced to your personal allowance plus an additional £5,000 tax free, then you pay 7.5% on any dividends up to £32,000. Any dividends over and above this will be charged at the higher rate of tax of 32.5%.

The examples below illustrate the tax payable in 2016/17 vs. 2015/16

Example 1 – £11k salary, £45k dividends

• The £11,000 takes up the entire personal allowance.
• The first £5,000 of the £45,000 is included within the dividend allowance.
• The next £27,000 are taxed at the basic rate of 7.5% = £2,025.
• The remainder of £13,000 is taxed at 32.5% = £4,225
• The total tax due is £6,250, compared to £4,188 in 2015/16
• The extra tax due is £2,062

Example 2 – £8,060 salary, £70k dividends

• Your £8,060 salary is included within your personal allowance
• The first £2,940 of your dividends is included in your personal allowance
• The next £5,000 is included within your dividend allowance
• The next £27,000 are taxed at the basic rate of 7.5% = £2,025.
• The remaining £35,060 is taxed at 32.5% = £11,394.50
• The total tax due is £13,419.50, compared to £9,776.88 in 2015/16
• The extra tax due is £3,642.62

So why will my tax be collected through my tax code as opposed to in my tax return as it has been done previously?

HMRC are looking to collect tax due on dividends for 2016/17 by amending your tax code for the year. This means you will have far less personal allowance to use against your salaries and will therefore pay more PAYE on this income. For those within the self-assessment system that are required to complete a tax return, the tax you are due to pay on dividend income would normally be due for payment on or before 31st January 2018, however by amending tax codes HMRC get their hands on the tax well before the due date.

The reduction in code number will be based on dividends that were taken within the 2015/16 tax year. The majority of 2015/16 tax returns have now been filed and HMRC can now look at dividends reported on an individual’s tax return to set the amended tax code for 2016/17. This may not work for a lot of people though, as dividends are not fixed and can change from year to year.

For some, paying the tax in advance over the course of the year through PAYE might seem like a good idea, and saves the hassle of having to find the money when the tax bill is due. However, for others they might not agree with the change – the good news is this is not enforceable and you can request your tax code to be changed back to allow for the standard personal allowance.

How do I go about getting my tax code changed back?

Anyone wanting their tax code amended back to “normal” should contact HMRC as soon as possible stating:

• You need your personal allowance fully available to use against your salary or other sources of income
• It is not known what level of dividends will be voted for in the year ending 5th April 2017
• As you are in the self-assessment system, the tax due on dividend income isn’t due until 31st January 2018

You can contact HMRC by telephone on 0300 200 3300 or completing an online coding notice enquiry form here.

You can also write to HMRC at Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS.

If you need help with dividends, you can also contact Hello Accountancy on 0800 8654330 or 07857 380805 or via email to lauren@helloaccountancy.co.uk