Some business owners and directors may be surprised when they receive their PAYE codes for 2016/17, as an estimate for dividend income may have been included to accelerate tax payable to HM Revenue & Customs (HMRC).
Dividend Tax Allowance (dividend income above £5,000) is now taxed at 7.5 per cent for basic rate taxpayers, as of 6 April 2016.
This now stretches to 32.5 per cent for higher rate taxpayers, and 38.1 per cent for additional rate taxpayers.
Following these changes to dividend taxation, HMRC has decided to send out tax code notices to some people where dividends for 2016-17 have been ‘estimated’ based on previous years. HMRC has then adjusted their tax codes in order to take a portion of this tax at source.
If you have been affected, this will increase your PAYE tax deductions in such a way that, from April, the extra tax will be collected on a monthly or quarterly basis with your PAYE rather than in your annual tax bill payable on 31 January 2018.
At Moore Thompson, our team would normally contact HMRC to request that the dividends are removed from the coding in order to ease our clients’ cash flow, as most would prefer to settle the dividend tax by 31 January following the tax year rather than by an increased PAYE deduction during the tax year.
It should also be noted that HMRC is not guaranteed to be consistent in its approach, which may mean that some shareholders will not be affected.
There have also been changes to directors’ loan accounts to bring them in line with dividend changes.
As of 6 April 2016, the rate of tax charged on loans to participators and other arrangements, which was previously set at 25 per cent, is now linked to the dividend upper rate, at 32.5 per cent. The measure is expected to bring in £310million in tax by 2021.
If you receive a new PAYE coding notice and want to know how it will affect your tax payments and what options are available to you, please contact us for advice.