Dividend Tax Update

The pain of payments on account

From 6th April 2016 a new tax on dividends is due to take effect.  I’ve written in previous blogs about the operation of this tax, so I’ll only introduce it in brief; instead of the current 10% tax credit system, a £5,000 tax free dividend allowance will be introduced. Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).

For shareholders of SME owner managed businesses that currently take a small salary to utilise their personal allowance and then dividends to the top of the basic rate band, they won’t currently have a personal tax liability each January.  However under the new rules the same shareholder receiving the same remuneration will incur a personal tax liability.  What may come as an even greater shock though is that if this tax liability exceeds £1,000 then the individual may also have to make payments on account towards the next tax year; these 50% instalments towards the next tax year are paid by 31st January and 31st July each year.  So in January 2018 (when the 2016/17 self-assessment liabilities become due for payment) business owners could be hit with their first personal tax liability, plus a further 50% towards the next year.

To avoid any last minute surprises we’ll be advising all clients to provide their 2016/17 tax return information as soon as possible after the end of the tax year.