New Dividend Allowance will affect PAYE tax codes
29 February 2016
From 6 April 2016 the Dividend Tax Credit will be replaced by a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year. This tax will be collected automatically through PAYE in most cases.
As announced in the Summer Budget 2015 a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per year is to replace the Dividend Tax credit from 6 April 2016. HMRC's Policy Paper provides details:
UK residents will pay tax on any dividends received over the £5,000 allowance at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
Dividends received on shares held in an Individual Savings Account (ISA) will continue to be tax free.
The finance Bill This legislation will modernise, reform and simplify dividend taxation. Only those with dividend income over £5000 per year, or those who are able to pay themselves dividends in place of wages, will pay more tax.
The majority of non-taxpayers and basic rate taxpayers do not currently need to inform HM Revenue and Customs (HMRC) of their dividend income. From April 2016, individuals who receive dividends between £5,001 and £10,000, and who need to pay tax on those dividends at the basic rate, will have to inform HMRC of their dividend income for the first time. This number is estimated to be fewer than 8,500 customers. (Individuals with more than £10,000 of dividend income are already required to be in Self Assessment).
Around 2 million individuals are expected to have some tax to pay on their dividend income after April 2016, compared to 1.8 million if these reforms had not been put in place. This tax will be collected automatically through PAYE in most cases, although further details will be published in good time ahead of any tax being due.
An interesting article from Accounting Web has highlighted the following:
“Under self assessment this additional tax would be payable by 31 January 2018, as the balancing payment for that tax year. However, HMRC doesn’t want to wait that long for the extra tax, so it has amended the tax codes of many owner/directors to “code out” an estimated amount, which is approximate to the dividend tax due for the year.”
Read the full article from Accounting Web.