The Tax Effect of the Changes to Dividends

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The changes to dividends, introduced this year, are in the majority of cases going to lead to an increase in personal tax liabilities. To recap, dividends are treated as the top slice of total income and the tax rate applied depends on your tax band.

The Rates 2016/17 2015/16
Tax Due 31/01/2018 31/01/2017
£0 – £5,000 0% 0%
£5,001 – £32,000 7.5% 0%
£32,001 – £150,000 (**) 32.5% 25%
Above £150,000 38.1% 30.6%

(**) please note there is a band of income between £100,000 and £120,000 that suffers a marginal rate of 60%. If your income is in this band, please talk to us about ways to mitigate such a high marginal rate.
Below are examples of the increase in tax at various levels of dividend income and has been calculated on the assumption that other income totals £11,000 and as such fully covered by personal allowances in 2016/17.

Net Dividend 2016/17 2015/16 Increase in Tax
£29,000 1,800 0 1,800
£50,000 7,875 5,300 2,575
£75,000 16,000 11,550 4,450
£100,000 26,600 22,475 4,125

The Tax Effect of the Changes to Dividends
If you receive income from dividends, the changes will affect the tax you pay in January 2018. If you have not made payments on account of your 2016-17 liability under the self-assessment system, you will face not only a bill for 2016-17, but half of this amount again on account of the 2017/18 liability.
For example, looking at a dividend income of £29,000, the tax due on 31 January 2018 will be £1,800 to settle the 2016/17 liability, plus a further £900 payment on account for 2017/18 – a total due of £2,700. If a husband and wife (civil partners) are drawing dividends at a similar level, the “family” tax payment due in January 2018 will be over £5,000.
If you draw dividends it is important you are aware of how the changes to dividends will affect you. This will enable you to plan and reduce any impact this may have on your cash flow from January 2018 onwards.
It has also come to our attention that HMRC is starting to amend PAYE coding notices to collect additional tax on dividends. This is not what the PAYE system was designed for and HMRC has no right to demand the tax in this way. If you receive any such PAYE coding notice amendments, please let us know immediately and we can help you get any dividend element removed.
If you would like to discuss the above in further detail, please contact Suda Ratnam by phone: 020 8418 2681 or email: