Changes to tax on dividends, effective from 6 April 2016, may have a surprising effect on 2016/17 PAYE codes.
Once the new dividend tax is in place, dividends falling outside a £5,000 dividend 'allowance' - will be taxed at 7.5 per cent, 32.5 per cent and 38.1 per cent depending on the individual’s level of income, leading to an increased tax liability for many company owners/directors.
This additional tax on dividend income would normally be collected through the self assessment system and be payable by 31 January the following year. However, affected tax payers may instead see a new deduction in the coding notices hitting their doormats over the next few weeks.
This deduction is referred to as 'dividend tax' but is not in fact tax. It is an amount of coding deduction estimated at a level to collect the appropriate amount of tax on the dividend income by deducting basic rate, higher rate or additional rate tax from payroll income. To check whether the amount is likely to recover the right amount of dividend tax requires a fairly detailed knowledge of the tax system and overall income level of the individual. Many taxpayers will be confused by this odd terminology.
Is this HMRC trying to get its tax upfront? Yes of course it is!
But does it have the power to do so? Income which is not already subject to PAYE can be estimated and included when determining the PAYE code. For individuals receiving a modest amount of untaxed interest or property income each year it may not pose too much of a problem for HMRC to make a reasonable estimate of the amounts involved. Dividends are another matter entirely, tending to be less modest and more irregular particularly in times of fluctuating profits and changing tax regimes. The potential for getting coding notices even more wrong than usual is immense.
The good news is HMRC can only include such a deduction in PAYE codes if the employee does not object. Employees receiving coding notices can object to having their dividend tax (and tax on any other non-PAYE income) collected early by either ringing the HMRC employee helpline or completing an on-line form setting out their objections. It should then be a fairly simple matter to reach agreement with HMRC on an amended code.
If you would like to discuss any of the points raised further, please contact Jackie Hall or your usual RSM contact.