Shocks in the 2016/17 PAYE codes

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The new dividend tax has thrown a spanner into the 2016/17 PAYE codes of owner/directors, as Rebecca Cave explains

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.

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 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 the taxpayer’s total income tax liability for 2016/17. 

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19th Feb 2016 09:00

Re 2 final paragraphs

Yes you can object to the code.

OR, you can pre-object to the code by completing the previous year's tax return correctly in the first place, and save the aggro.
It certainly should not come as a "shock", if you didn't bother to make that effort.

With kind regards

Clint Westwood

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22nd Feb 2016 13:08

Timewasting!

nogammonsinanundoubledgame wrote:

Yes you can object to the code.

OR, you can pre-object to the code by completing the previous year's tax return correctly in the first place, and save the aggro.
It certainly should not come as a "shock", if you didn't bother to make that effort.

With kind regards

Clint Westwood

 

We completed the previous tax year return correctly and still have had a few PAYE coding notices come through regarding the Dividend tax changes. Seems to make no difference.

Also, after speaking to a HMRC Agent, it seems like this could be a process each year meaning each year you would need to tell them to not tax the dividend tax through the PAYE code.

Hopefully they will revisit this system!

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.

We ignore coding notices for small director companies with a director only payroll. Not worth the energy given there is zero come back from HMRC and they are invariably wrong and it all comes out in the wash when you file SA. 

Its also a bit odd for HMRC to chase in this manner. By introducing a tax payment from the director to HMRC, firms that comply with this will then make an obvious decision that it is a "no brainer" to pay a higher salary and use the Employment Allowance (where possible), which you may otherwise have ignored due to the hassle & cost vs amount of tax saved.  Or in other words HMRC spend a lot of cash on sending out notices which are then changed (more cost) only to lose out in taxes overall.  

All for the sake of some slightly accelerated tax payments. Short sighted planning at its best.

 

 

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Annual payroll scheme

Haven't seen any of these coding notices.

Anyway if they do arrive I see two options:

1. Do as @ireallyshouldkn... does.

or

2, Use an annual payroll scheme for directors - one salary payment in March but dividends paid through the rest of the year.

 

 

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19th Feb 2016 12:16

Interesting topic

We are all working in the dark here.  We don't know how much dividend income we shall have in 2016/17.   HMRC certainly doesn't know how much dividend income we shall have.

When I spoke to HMRC about this earlier this week they confirmed the point made here by Rebecca i.e. they will, on request, remove the dividend tax adjustment from the code for taxpayers who are in self-assessment.

So we all need to have a discussion with our self-assessment clients about this.

But what about indiviiduals who are not in self-assessment?  I foresee scope for underpayments and (if HMRC makes dividend tax adjustments through PAYE codes) overpayments too.

Interesting topic.

 

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.

@k.bonney,for those currently out of SA, ie basic rate tax payers with dividends, HMRC simply don.t have a mechanisms to know what the dividends are.  They will all have to go into SA. This means probably 30-40 plus returns for us for 2016/17. 

Let us pray they don't go back to ACT to find out.

 

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19th Feb 2016 13:32

Yes saw one a couple of days ago

plan to use an annual scheme in this particular case.

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19th Feb 2016 14:23

We use

annual schemes anyway. Have done for ages. I too ignore HMRC coding notice (only when I'm 100% sure I'm right - which is pretty much all the time).

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20th Feb 2016 13:28

Glad I'm not the only one

johnjenkins wrote:

annual schemes anyway. Have done for ages. I too ignore HMRC coding notice (only when I'm 100% sure I'm right - which is pretty much all the time).

John.

Where I have control of the payroll I effectively self-assess the code - I'm not prepared to spend 45 minutes on the phone getting it amended.

Had one this week which amended the code from 1100L to K660. Reason given was an adjustment to the basic rate band of £17,613 - "go to note 2".

Note 2 says "We have included this adjustment as you have more than one job or pension and we estimate some of your income is taxable at a higher rate". Since the taxpayer had no income taxed at the higher rate in 14/15 it follows that the prat that issued the code has clairvoyant powers. I'm quite happy to be judged on my actions.

 

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20th Feb 2016 08:50

Example

Hi

Is the example quoted correct? or have I read it incorrectly?

It appears to allow an additional £2900 dividends as tax free - taken up with unused personal tax allowance of £11000 - £8060.

I was under the impression that dividend allowance was outside normal tax free income, is that a mistake or do I need to rework all my calculations.

So that above example of £34900 of dividends s/b £5k at nil and £27k at 7.5% and £2.9k at 32.5%

Re tax codes I pretty much always ignore the ones that give my clients no monthly income, normally 2/3 per year - always the same clients regardless of what you tell HMRC every year or what boxes are ticked on the return. Never had a problem as long as taxpayer keeps up POA and settles bill in Jan.

Regards

Chris

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By JimH
20th Feb 2016 09:12

Dividends through PAYE
Where we've seen this, typically when we've taken on a client who's previous agent didn't tick the 'do not collect' box in self-assessment, we have one brief conversation with the client, inform the impact, the requirement to supply estimated income if they want the code changed and let them decide.

Then it's one quick call on the agent line. Isn't this part of our normal service to clients? Attempting to tax dividends through payroll is hardly a shock or surprise and don't see it's a big deal to give clients the choice.

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21st Feb 2016 21:00

Untaxed Interest?
Why do PAs have to be set against the untaxed Interest .?

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22nd Feb 2016 08:31

Eh?

the_Poacher wrote:
Why do PAs have to be set against the untaxed Interest .?
You would rather pay tax on the untaxed interest?
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22nd Feb 2016 10:01

PSA - not available unfortunately

nogammonsinanundoubledgame wrote:

the_Poacher wrote:
Why do PAs have to be set against the untaxed Interest .?
You would rather pay tax on the untaxed interest?

I think the_Poacher is wondering why you can't use the personal savings allowance against the interest, and instead use the PA against the dividend income, yielding a saving (in this case) of 40 @ 7.5% = £3

Good thought: unfortunately the rules don't allow it. There has been no change to the order of taxing income, or the order in which the PA is applied.

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22nd Feb 2016 08:45

@Chris Ash

The example is correct. All dividends form part of total income and any remaining personal allowance (after non-savings and savings income has been dealt with) is available to set against dividend income. The dividend "allowance" is simply a special 0% tax rate for the first £5,000 of taxable dividend income, as a replacement for the rate that would otherwise apply of 7.5%, 32.5% or 38.1%.

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22nd Feb 2016 09:12

Thanks

Ardeninian wrote:

The example is correct. All dividends form part of total income and any remaining personal allowance (after non-savings and savings income has been dealt with) is available to set against dividend income. The dividend "allowance" is simply a special 0% tax rate for the first £5,000 of taxable dividend income, as a replacement for the rate that would otherwise apply of 7.5%, 32.5% or 38.1%.

 

Ok thanks for clarification

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22nd Feb 2016 13:28

Ordering of PA

s.25(2) ITA 2007 requires that personal allowances should be deducted against income sources under step 3 in s.23 in such an order as to minimise the tax liability.

In most cases (perhaps barring some fringe circumstances which I suspect that neither HMRC software, nor 3rd party which mimics HMRC, cope with) this historically resulted in the PA being allocated to income sources in priority according to their "slice" ranking, lowest slice first.

This PSA now possibly throws a cat among the pigeons.  Suppose you have dividend income in excess of £5K but savings income that is wholly covered by the PSA.  Any available PA you would want to set against dividend income in preference to savings income  Indeed s.25 says that you must do so.

This is going to add a few hours to my spreadsheet design time.

Form 930 is dead. Long live Form 930.

With kind regards

Clint Westwood

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22nd Feb 2016 16:07

I think you're onto something here...

nogammonsinanundoubledgame wrote:

s.25(2) ITA 2007 requires that personal allowances should be deducted against income sources under step 3 in s.23 in such an order as to minimise the tax liability.

In most cases (perhaps barring some fringe circumstances which I suspect that neither HMRC software, nor 3rd party which mimics HMRC, cope with) this historically resulted in the PA being allocated to income sources in priority according to their "slice" ranking, lowest slice first.

This PSA now possibly throws a cat among the pigeons.  Suppose you have dividend income in excess of £5K but savings income that is wholly covered by the PSA.  Any available PA you would want to set against dividend income in preference to savings income  Indeed s.25 says that you must do so.

 

On reflection I agree with you on this. Unfortunately we can't be sure how the changes will be implemented until we get the Finance Bill.

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22nd Feb 2016 12:14

Oh dear this is going to be time consuming

Have just received a 2016-17 PAYE code showing a restriction of £130 for untaxed interest.

Coincidentally, 2014-15 tax return showed (gross) £130 of taxed interest.

And this is a basic rate taxpayer.

So even accepting the lack of tick on box 3 as reflecting the taxpayer's desires, it is wrong.

I hope that this is not automated.

With kind regards

Clint Westwood

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22nd Feb 2016 12:40

Just use a bit of common sense

We have seen quite a lot of these codes and in some cases have chosen to ignore them - where we prepare the payroll and we know self-assessment will finalise the position without too many issues.

However, we do have many clients (typical husband and wife companies), whereby the new dividend tax will mean that that this will be the first time that they will be subject to the actual payment of self-assessment tax.  Despite the fact that we have informed clients of this on numerous occasions, we know it will still come as a shock to them.

The reality is that the tax will be due, regardless of annual payroll schemes, or ignoring coding notices, and for those of my clients that will simply be subject to this tax (basic rate only), I suspect that they would prefer to pay a small regular monthly amount via payroll than:

             1)  - A large SA payment on 31st Jan

             2) - Payments of Account - which will be avoided if the coding notice is used

Think before you ignore/challenge the coding notices, they may be more appropriate to a clients' cash flow position.

 

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22nd Feb 2016 13:12

Another fine mess...

Going to be messy.  I'll happily ignore coding notices coding in for dividends that may or not be paid as until they are actually declared and paid we have no way of knowing whether any will be paid for a year, and to assume they will be before the year even starts and tell clients to pay tax on them on a monthly basis..my clients would rather keep their money in their bank account for another few months rather than hand it over to HMRC.

I'm sure a lot of clients will wonder why their tax bill suddenly jumps..even after being told frequently that the bill is rising.  At least we'll be able to warn them well in advance what January's tax payment will be so they can prepare to be hit with it, along with the inevitable POA...

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By NH
22nd Feb 2016 14:47

dont throw it out completely

Ian McTernan CTA wrote:

along with the inevitable POA...

This is surely a big consideration to make - if collected through PAYE there will be no POA, however paid under SA there will be

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22nd Feb 2016 15:23

POA and the new regime

Ian McTernan CTA wrote:

I'm sure a lot of clients will wonder why their tax bill suddenly jumps..even after being told frequently that the bill is rising.  At least we'll be able to warn them well in advance what January's tax payment will be so they can prepare to be hit with it, along with the inevitable POA...

Surely this is just another manifestation of HMRCs new "We want your tax - and we want it now" regime?

From 3 months ago:

http://www.accountingweb.co.uk/article/osborne-accelerates-hmrc-s-digita...

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By IANTO
22nd Feb 2016 15:33

Taxing dividends

I guess if YourCo's year end is different from HMRC's, as mine is, i.e. not 03/04/20YY, then that will also further complicate matters!

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23rd Feb 2016 09:07

Paye coding notices
Isnt it illegal to simply ignore them?

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By CBPTS
23rd Feb 2016 11:33

Class 2 NIC

Has anyone spotted a class 2 NIC collection restriction in the 'new' 2016/2017 PAYE tax codes?

Discuss.

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23rd Feb 2016 17:05

Class 2 restriction

I had one of these for a client in 2014-15, first one I had ever seen.  It was for a gap from some years ago.  Interestingly, it was at the rate for the year in question, not the current rate which I thought was used for contributions in arrears more than a year old.

I find that using the agent's helpline enables coding changes to be made in a couple of minutes.  I guess for non SA clients it will be a pain though.

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23rd Feb 2016 18:12

deleted

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By cfield
25th Feb 2016 15:45

Employment Allowance

Rebecca assumes in her example that the £3k Employment Allowance won't be available for one-person payrolls, which of course it won't if they stay one-person payrolls, but has anyone found out yet if you can dodge that somewhat unfair restriction simply by putting someone else on the payroll, say a co-operative spouse or partner, and if so, whether you actually need to pay them anything, and if so, how much?

It seems unlikely that they haven't covered that angle, but I haven't seen anything yet to confirm it. Even if they have, I'm sure contractors and other solo businesses can put each other on their payrolls in "scratch my back" arrangements.

Getting close to the year end. We need to find out pretty soon now.

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25th Feb 2016 22:55

Gave up long ago

I long since gave up even bothering to look at HMRC's silly PAYE codings.  Life is too short.

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By Kemu
05th Apr 2016 17:45

Low salary to avoid paying NI

The OP gave an example where a person " plans to reduce her salary to £8,060, as her one-person company will lose the employment allowance for 2016/17 and she doesn’t want to pay employer’s or employees’ NI for the year."

I see this suggestion a lot regarding 'topping up' with dividends. I may be missing something, but I think this means the person doing so would fail to achieve a qualifying year for the state pension. How does this person take advantage of the other benefits that come as a result of NI contributions?

Has everybody given up on trying to qualify for the state pension?

 

 

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05th Apr 2016 18:14

Don't have to contribute?
Surely there's no need to actually pay NI, the salary just has to be sufficient to exceed the relevant limit. That way you can minimise your contribution to the state but maximise what you get back.

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05th Apr 2016 18:58

You are missing something

Kemu wrote:

The OP gave an example where a person " plans to reduce her salary to £8,060, as her one-person company will lose the employment allowance for 2016/17 and she doesn’t want to pay employer’s or employees’ NI for the year."

I see this suggestion a lot regarding 'topping up' with dividends. I may be missing something, but I think this means the person doing so would fail to achieve a qualifying year for the state pension. How does this person take advantage of the other benefits that come as a result of NI contributions?

Has everybody given up on trying to qualify for the state pension


Basically nonsense, sorry. £8060 is enough for the year to qualify for state pension.

With kind regards

Clint Westwood

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By JimH
05th Apr 2016 19:04

paying NIC at 0%
You are missing something. A salary at or above LEL and reported under RTI earns a qualifying year credit for state pension.

This is whilst below primary threshold where employee starts to pay NIC (and secondary threshold when employer starts to pay NIC).

Employee is paying NIC, but at 0% on a monthly salary between £486 and £672 (£5,824-£8,060 on annual basis)

Kemu wrote:

The OP gave an example where a person " plans to reduce her salary to £8,060, as her one-person company will lose the employment allowance for 2016/17 and she doesn’t want to pay employer’s or employees’ NI for the year."

I see this suggestion a lot regarding 'topping up' with dividends. I may be missing something, but I think this means the person doing so would fail to achieve a qualifying year for the state pension. How does this person take advantage of the other benefits that come as a result of NI contributions?

Has everybody given up on trying to qualify for the state pension?

 

 

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By Kemu
05th Apr 2016 18:59

That's probably what I've been misunderstanding

Thanks both. I get it now.

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By JimH
05th Apr 2016 19:11

as is a salary of £5,824

Quoting " £8060 is enough for the year to qualify for state pension." as is a salary as low as £5,824.

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