From April 2016, the new dividend tax rates will apply and HMRC don’t want to wait until 2018 to collect your money.

As you are probably already aware, from April 2016 the new dividend tax rates come into effect. If you do not already know about these changes (and believe me, you will not be the only one) then read our blog on the subject here.

As explained in the above blog, the changes mean that almost everyone who has shares in a limited company will be impacted by an effective five percent increase on dividend tax.

Under self-assessment, this additional tax would be payable on 31st January 2018. However, HMRC does not want to wait this long for the extra tax and so has amended the tax codes of many owner/directors to deduct this additional tax through PAYE.

The problem with these new tax codes are they are based on assumptions – In most cases, HMRC will extrapolate from the data that they receive on prior Self Assessment Tax Returns.

If these assumptions are incorrect, then you could find yourself in a position whereby you are overpaying tax.

How will I know if I am affected?

When you receive your PAYE tax coding notice for the year 2016/17 the deduction in the PAYE code will be labelled ‘dividend tax’ and the notes on the P2 will say:

“This is to collect the basic rate of tax due on your dividend income”.

If you are a higher rate tax-payer then the P2 notes refer to an adjustment for higher rate tax.

What can I do if I am affected?

You can, of course, accept your new code provided by HMRC (but who wants to pay tax earlier than necessary?) OR You will be pleased to know that you (or your accountant on your behalf) can object to having dividend income included in your PAYE code.

You can do this by either ringing HMRC or completing this online form. Whatever you decide, our advice would be to get in touch with your accountant to discuss your situation. Call Hive on 01872 300232 or email us at hello@hivebusiness.co.uk.