13th May 2016 Posted by - Alexander Accountancy
Since 6th April 2016, the way dividends are taxed has changed and HM Revenue & Customs have latched on to this as an excuse to reduce some tax codes. This reduces net income that individuals rely on without prior warning.
Although dividend income has previously been taxed under Self Assessment and there is an option for this income to be taxed through PAYE, HM Revenue & Customs are reversing the default position and logic.
They are assuming a certain level of dividend income will continue which could be based on information that is out of date, then adjusting the tax codes to collect the estimated additional tax through PAYE. Their excuse is that it can help with the individuals financial planning and avoid bigger amounts becoming due once or twice a year. The fact they are collecting tax that may not even be due at a much earlier date, improving the revenue income they are receiving has obviously played no part in their thinking. And why should they consider it necessary to warn the tax payer in advance since it is only food and rent or mortgages that they may not be able to pay for?
One of our clients who has always received a low income and relied on dividends to be paid from profits has recently been hit by this HMRC policy. His PAYE code was reduced for anticipated dividend income and he was charged for estimated higher rate tax without any warning.
The true position is that he has lost some major work, is unlikely to receive any dividends this year and he has never paid higher rate tax in the five years we have dealt with him.
If this happens to you, the way to sort it out is to telephone HM Revenue & Customs and tell them to allocate your full personal allowance to your PAYE income. This is because you wish to pay tax on the remaining income, if there is any, through Self Assessment.
For more advice on tax issues, please call Alexander Accountancy on Burton on Trent 01283 743851
