A hike in tax rates will affect dividends you receive on or after 6 April 2016. Working out how much the extra tax will-be is tricky enough, but when and how will you be expected to pay it?
New tax rules – recap
As a shareholder you’ll be aware by now that the tax payable on dividends you receive on or after 6 April 2016 is subject to the following new rules and rates:
- Dividends are longer increased by one ninth to arrive at the taxable amount
- The first £5,000 is tax-free, but the tax-free dividends you receive will use an equal amount of your basic rate tax band (see the first example below)
- Dividends above £5,000 are taxed at 7 .5% where your total taxable income is no more than the basic rate band (£32,000 for 2016/17)
- Dividends falling into the higher rate band are taxed at 32.5% and those in the additional rate band, i.e. where your annual taxable income exceeds £150,000, are taxable at 38.1%.
Example 1. Fran is director shareholder of Acom Ltd. For 2016/17 her income is: salary and benefits from Acom £11,000, plus dividends from Acom and her share portfolio of £65,000. The personal taxfree allowances for 2016/17 are £11,000. These must be used to cover Fran’s salary. £5,000 of dividends will be tax free and the next £27,000 will be taxed at 7 .5% – that uses Fran’s basic rate band (£5,000 + £27,000 = £32,000). The rest of the dividends, £33,000, are taxable at 32.5%.
When’s it due?
The new rules mean that many director shareholders who are only liable at the basic rate will have to pay tax on their dividends for the first time. Plus those liable at higher rates will have larger than usual tax bills on 31 January 2018.
What’s more, all taxpayers affected by the new dividend tax rates may, possibly for the first time, have to pay an extra tax instalment on 31 July 2018.
Example 2. Jack’s salary for 2016/17 is £10,500 ‘plus dividends of £25,000’. In 2015/16 there would be no tax to pay, but for 2016/17 Jack will owe HMRC tax at 7.5% of £19,500.
More tax and sooner!
Jack will owe tax of £1,462.50 (£19,500 x 7.5%) payable on 31 January 2018. As he’s aware of the dividend tax changes he might be expecting this, but what he may not realise is that because of the way self-assessment works he’ll also have to pay HMRC an amount on account for his 2017/18 tax bill. The amount is the same again payable in two equal parts. The first £731.25 is also payable on 31 January 2018 and the other on 31 July 2018. This principle will apply for every director shareholder facing the new tax rates (see the next step).
Tip. Quite simply if you don’t want to be caught by an unexpected tax bill you need to be prepared for how the new rules will affect your tax liability.
Any additional tax on dividends will usually be payable through the self assessment system. That means it will first affect your tax bill on 31 January 2018. You may also be required to make another payment on 31 July 2018.