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When will the new dividend tax be payable?

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 no 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
  • 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. Maisie is director shareholder of Newco Limited. For 2016/17 her income is: salary and benefits from Newco of £11,000, plus dividends from Newco of £65,000. The personal tax-free allowances for 2016/17 are £11,000. These must be used to cover Maisie’s salary. £5,000 of dividends will be tax free and the next £27,000 will be taxed at 7.5% – that uses Maisie’s basic rate band (£5,000 + £27,000 = £32,000). The rest of the dividends, £33,000, are taxable at 32.5%.

WHEN IS 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 installment on 31 July 2018.

Example 2. Alice’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 Alice will owe HMRC tax at 7.5% of £19,500.

Salary: £10,500
Dividends: £25,000
Less Personal Allowance: (£11,000)
Less Dividend Zero Rate: (£5,000)
Taxable Amount of Dividends: £19,500

MORE TAX AND SOONER!
Alice will owe tax of £1,462.50 (£19,500 x 7.5%) payable on 31 January 2018. As she’s aware of the dividend tax changes she might be expecting this, but what she may not realise is that because of the way self-assessment works she’ll also have to pay HMRC an amount on account for her 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.