HMRC surprise shareholders with new PAYE dividend tax code

27 September, 2016

A large proportion of business owners and directors may be in for a surprise when they receive their 2016/17 PAYE codes, as an estimate for dividend income may have been included to accelerate tax payable to HM Revenue and Customs (HMRC).

Changes to dividend tax payable means HMRC will send out tax code notices to some people where dividends for 2016/17 have been estimated, based on data from previous years, with a portion of this tax taken at source.

Those on the receiving end of the new tax code will notice an increase in their PAYE tax deductions. The extra tax will be collected on a monthly or quarterly basis with your PAYE, rather than in your annual tax bill payable on 31 January 2018.

At Watson Buckle, where we prepare your tax return we would normally contact HMRC to request that the dividends are removed from the coding in order to ease our clients’ cash flow. The tax payable can then be settled by 31 January the following tax year, rather than by an increased PAYE deduction during the tax year.

It should also be noted that HMRC is not guaranteed to be consistent in its approach, which may mean that some shareholders will not be affected.

If you receive a new PAYE tax code notice and want to know how it will affect your tax payments and what options are available to you, please contact Watson Buckle for advice.

Also announced in 2016:

Dividend Tax Allowance (dividend income above £5,000) is now taxed at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers, and 38.1 per cent for additional rate taxpayers, as of 6 April 2016.

The rate of tax charged on loans to participators and other arrangements, previously set at 25 per cent, is now linked to the dividend higher rate of 32.5 per cent, as of 6 April 2016.