We’re being plagued by a plethora of clients asking us why their income tax bill is so much higher than last year; all this despite us explaining some time ago about the tax change that would see a hike in the amount of tax due.
So here’s a reminder of why your tax bill may be higher.
In April 2016 the new Dividend Tax was introduced.
This hits dividend income in the tax year 2016 / 2017 which appears on the self assessment due to be filed by 31 January 2018.
The first lot of dividend tax will be paid on 31 January 2018.
The changes meant that, whereas before if you were a standard rate tax payer no extra tax would be due on dividends, now you would need to pay extra tax.
The first £5,000 of dividend income is tax free.
Note the plan is to reduce this tax free dividend income allowance to £2,000 from April 2018.
After that dividends are taxed at the following rates:
- Dividends falling within basic rate tax – tax at 7.5% of the dividend received is due
- Dividends falling within higher rate tax – tax at 32.5% of the dividend received is due
- Dividends falling within the additional rate of tax – tax at 38.1% of the dividend received is due but remember that for income over £100, 000 your personal allowance starts to get restricted
In reality this means an extra 7.5% of tax is due across all tax bands.
Payment on Account
Not only is there additional tax to pay but you may also have to make a Payment On Account towards you tax bill for 2017 / 2018 (the current year).
A Payment on Account (POA) is a contribution towards your tax bill for the current tax year. POAs get made on 31 January and 31 July if you’re tax bill is more than £1,000.
The amount is calculated by looking at your previous year’s tax bill. POAs made get deducted from the tax owed on your next self assessment; so you are not paying tax twice.
What this means in reality is that, for the tax year 2017 / 2018, you will pay the following additional tax.
|Amount of dividend||Additional Tax you will pay||Total Additional Tax to Pay on 31/01/18 including 1st POA|