Company owners and directors beware!
Any company director, who keeps their salary under their Personal Allowance and makes up the rest as dividends, will be paying more income tax from the 16/17 tax year. The new, so-called ‘dividend tax’ will apply to all dividends over £5,000 per tax year, per taxpayer.
What is the dividend tax for?
According to HMRC PAYE Coding notice “this is to collect the basic rate of tax due on your dividend income”. So, the tax is collected by changing your tax code. There will be a higher rate for a higher rate taxpayer.
Is the dividend tax rate still going to be 20%?
No, there will be a three-tier system which depends on which tax band you are in:
- Basic rate taxpayer – 7.5%
- Higher rate taxpayer – 32.5%
- Additional rate taxpayer – 38.1%
In order to check that HMRC has taken off the correct amount in dividend tax, you will need to work on an estimate of your 2016-17 income tax bill. Simple….!
Why is this not included in my tax return?
HMRC want to collect some of this additional tax before the 31 January 2018, which is when your tax bill for 2016-17 is due to be settled. So they are using the PAYE code change to collect it early instead of waiting for your tax return to be filed and by using estimated figures.
Bank Interest
From April 2016, banks will no longer take off a basic rate of tax from your bank interest. There is a savings allowance of £1,000 or £500 for basic and higher rate taxpayers which, combined with your Personal Allowance, can be set against any interest you earn. HMRC are putting bank interest in PAYE codes, when it should only offset interest that is over the savings allowance against the Personal Allowance.
Can I do anything about this change to my PAYE code?
Yes, all taxpayers can get in touch with HMRC to object to interest and/or dividend income being part of your PAYE code.
