THE STING IN THE TAIL – You Will Be Paying Tax Each Month

Jelly fishNow for most people this is no different to what they normally do and if you are a PAYE only employee or self-employed, then this won’t be relevant to you now. BUT, if you are a Company Director/Shareholder (or plan to be), then this will affect you.

 

Dividend Tax – yawn yawn, it’s been mentioned all over the place by many accountants and observers that from 6th April 2016, you will get a £5,000 tax free allowance for dividends in the year, and any dividends after that will be taxed at 7.5% if you are a basic tax payer, 32.5% if you are a higher tax payer, and 38.1% if you are an additional tax payer.

 

That’s fine if you only own a few investments, but if you are a director/shareholder of your own company it can hit you hard.  It is likely that you’ll only be paying yourself a small amount of salary, maybe enough to get your national insurance credit, but not to pay NI or PAYE. Let’s say this is £8,000 as I like easy numbers. You have your personal tax allowance of £11,000 for the year, so you still have £3,000 of available allowance. Woo Hoo. At the moment, it appears that the first £3000 of dividends will be covered by the personal allowance and then you get the £5000 dividend allowance. So assuming you have no other income anywhere (I am ignoring the savings allowance), then you can have £8000 of salary and £8000 of dividends before tax is paid. Over £8000 of dividends  will be taxed at 7.5% etc. per the above.

 

A better example for those that have a bit more dividend income:

 

New rules of 2016/2017 Old rules if applied to 2016/2017
tax paid tax paid
Salary of £8000 0 Salary of £8000 0
Dividend paid of £50000 Dividend paid of £50000 = value £55,555
 – £3000 covered by personal allowance 0  – £32000 @ 10% 3,200
 – £5000 covered by dividend allowance 0  – £23555 @ 32.5% 7,655
 – £27000 taxed at 7.5% 2,025 Less dividend credit -5,555
 – £15000 taxed at 32.5% 4,875
Total tax to pay 6,900 Total tax to pay 5,300

The upshot here is you pay £1,600 more tax that you would have done.

 

If that is not bad enough, HMRC do not want to wait until January 2018 deadline for self-assessment to get their hands on the money. They have decided to change the PAYE code in order to get some of the tax from you each month. This will be seen as a line called “dividend tax” on your P2 coding notice.

 

In all the illustrations I have read, it only talks about basic rate tax payers, but the change will also be put through for higher rate payers which in theory will produce a negative tax code. Some say it’s fairer and will put director/shareholders in the same position as PAYE employees in paying tax monthly, but where the issue does come up is if you have had a bumper year and paid a lot of dividends in the year, your tax code will be based on that year. If things are not so good, you’ll be paying tax on money not received. .You could think of it as a savings plan, or you could appeal the notice of coding my calling HMRC or completing their on-line form found here >>>> (https://online.hmrc.gov.uk/shortforms/form/P2) <<<< and you can enter all your expected income and benefits for 2016/17 including expected dividend receipts.

 

 

 

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