Owners and shareholders need to be ready for the change to dividends

Accountants Pritchett & Co Limited are encouraging business owners and shareholders to reassess their position on dividends following the changes to the way they are taxed.

From 6 April 2016, the way dividends are being taxed will change and the 10 per cent tax credit currently available to taxpayers will be abolished.

Instead, each individual will have available a flat rate dividend allowance of £5,000. Any dividends received in excess of this allowance will be taxed as follows:

  • 7.5 per cent if dividend income is within the standard rate (20 per cent) band
  • 32.5 per cent if dividend income is within the higher rate (40 per cent) band
  • 38.1 per cent if dividend income is within the additional rate (45 per cent) band

These changes are likely to have a direct impact on the overall savings in NIC and income tax that can be achieved by those who receive dividends and some people may find it beneficial to reassess their remuneration policy.

Recently, the House of Lords Economic Affairs Committee said that HM Revenue & Customs (HMRC) had poorly communicated these changes and that the changes were complex, confusing to the majority of tax payers. 

In light of this, Pritchett & Co Limited is worried that some people may still be caught out by the changes and might end up paying more in tax than they need to.

Rob Kenwell, director at North Wales based accountants Pritchett & Co Limited, said: “It would seem that HMRC have done a poor job of communicating the changes to dividends to taxpayers and there are likely to be many people out there who are in the dark about how this will affect their affairs.”

“These changes represent a significant change to the rules and those who are not aware or don’t understand the changes need to act quickly to get the help they need.”

Dividend recipients also needed to be aware that HMRC had amended the tax codes of many owners, directors and shareholders to “code out” an estimated amount, added Rob Kenwell.

The deduction in the PAYE code will be labelled ‘dividend tax’, as part of HMRC’s goal to move the payment of tax forward. 

“To work out whether the deduction for “dividend tax” is approximately correct the estimate for your total income tax liability for 2016/17 will need to be checked, including funds received through savings and investments,” said Rob Kenwell.

“Failing to get your PAYE code correct could have a significant effect on the amount of tax you pay in the following year, so ensuring that it is right is vital. Those who are unsure should seek professional assistance to help them with their dividend affairs.”

If you would like help to make sense of the changes to dividends then our team at Pritchett & Co Limited can help. To find out more, please contact us at info@pritchettandco.co.uk or call us on 01492 534250.

The author is a director at Pritchett & Co Limited, Chartered Accountants and Chartered Tax Advisers, members of UK200Group with offices throughout the UK and Associates overseas.  

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