Although the new dividend tax regime started on 6th April 2016, it will be some time before company owners feel the effects on their take-home pay. Here, a leading accountant outlines the key dates contractors should prepare for to ensure they are not caught out by the tax hike.
The new dividend tax regime
As many company owners will know by now, the way dividends are taxed changed significantly on 6th April 2016.
The old system of tax credits has been replaced by a simpler system of fixed dividend tax rates, linked to the prevailing income tax bands.
Dividends are now taxed at 7.5%, 32.5% or 38.1% depending on which tax band they fall into (basic, higher, and additional tax bands).
Unsurprisingly, the new dividend tax regime means that almost all limited company owners will be worse off as a result.
Of course, how much worse off depends on the amount of dividends you draw down, but a contractor earning £80,000 per year can expect to pay over £4,000 more in tax compared to the previous regime. You can find out more in our guide to the new dividend tax.
Noticing the difference
In this article, Elaine Clark, MD of CheapAccounting explains that although the effective date of the new tax was 6th April 2016, it is unlikely that anyone would have noticed the difference up till now as there’s no tax due yet.
The only difference so far is that a slightly amended format for the dividend voucher and board meeting minutes would be needed as the 10% tax credit has been eliminated.
So when does the impact really hit?
The first time that the new tax will really hit the pocket of those in receipt of dividends is on 31st January 2018.
Well, the new dividend tax applies for dividends received after 6th April 2016.
That means it is for the tax year 2016 / 2017.
Dividends received in the tax year 2016 / 2017 will be reported on the 2016 / 2017 self assessment tax return.
The 2016 / 2017 self assessment tax return has to be filed by 31st January 2018.
Any tax due from the self assessment tax calculation has to be paid by 31st January 2018.
31st January 2018 may seem like ages away but, to avoid any surprise tax bills, you need to be putting aside the additional income tax due on the dividends that you have been and will be taking from your limited company since 6th April 2016.
Sting in the tail
Many may have a double whammy of tax due on 31st January 2018.
It could be the first time that many have had to make a payment on account.
What is a Payment on Account?
A payment on account (POA) is an amount paid towards the tax due in your current tax year.
A POA is due when your tax bill for the year that you are completing the self assessment for is more than £1,000.
Payments on account have to be made in two instalments – 31st January and 31st July.
This could mean that many will have to pay one and a half times the total tax bill on 31st January but that should be OK as you should have been budgeting for it as you go!
So make sure that you are prepared … put aside the tax due on your dividends as you go!