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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About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.