New dividend tax has knock-on effect for owner/director PAYE codes

HMRC’s new dividend tax will cause complications in the 2016/17 PAYE codes used by owners and directors.

The new tax will take effect from 6 April 2016, affecting all dividends individuals receive in excess of £5,000 per year.

A typical company director taking home a modest salary within their personal allowance, and the remainder of their income from the firm as dividends, will pay significantly more tax in the 2016/17 tax year than in previous years.

The new dividend tax will be charged at fresh rates of 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and at 38.1% for an additional rate taxpayer – as opposed to the basic tax rate of 20%.

Traditionally, the extra tax would be payable by 31 January 2018 via self-assessment – as the balancing payment for that tax year.

However, under the new rules, HMRC will amend the tax codes of owners and directors to automatically “code out” a sum approximately equal to the amount of dividend tax due for that tax year.

The deduction in the PAYE code will be clearly labelled “dividend tax”, but HMRC’s estimated figure might not always be accurate.

In order to work out for yourself whether HMRC’s deduction is fair, taxpayers will need to estimate their total income tax liability for 2016/17.

Additionally, if individuals have not already paid the balance of their income tax due for the previous tax year, HMRC will add a 5% surcharge on the amount due.