Whilst it was announced some time ago that the rate of taxation on dividends will increase by a whopping 7.5% the reality of what this actually means is yet to hit home for millions.
When will you pay the new dividend tax?
The new dividend tax was introduced from 6 April 2016.
The additional dividend tax due will be calculated as part of your self assessment for 2016 / 2017 covering the period from 06/04/16 to 05/04/17.
This self assessment has to be filed on or before the 31 January 2018 deadline.
Any additional tax due as part of your self assessment, including the new dividend tax, will have to be paid by 31 January 2018.
Refresher on the new rules
Under the new rules the first £5,000 of dividends received on or after 6th April 2016 are tax free.
After that the following rates of tax are due:
- 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 also starts to get restricted
In all cases this means that an extra 7.5% of tax is due on dividends across all tax thresholds.
Sting in the tail – 50% more to pay
Not only will you have to fork out the additional dividend tax on 31 January 2018 but you’ll have to pay an extra 50% of the dividend tax due by way of a payment on account!
A payment on Account is a tax payment made twice a year (31 January and 31 July) as a contribution towards your tax bill for the current tax year. The amount is calculated by looking at your previous year’s tax bill. You’ll make a payment on account if your tax bill is more than £1,000.
How much more ADDITIONAL tax
Let’s have a look at what this means in reality for all of those in receipt of dividends.
|Amount of dividend||Additional Tax you will pay||Total Additional Tax to Pay on 31/01/18|
Note – the calculations assumes no other income.
Encourages tax mitigation strategies
Additional tax amounts like these are more than likely to encourage more aggressive tax mitigation strategies such as putting money into pensions, renting your home office at a market value rent and suffering income tax on any profit derived from the rental or making loans to directors to be paid back when the business is sold on or the directors retire. All of these are perfectly legitimate strategies.
Faced with the ever increasing stories about the derisory amounts of tax paid by big businesses can we seriously blame the hard working entrepreneur for looking at ways to mitigate the shortfall in household incomes?
Unfairness and De-motivating entrepreneurs
I believe that the new dividend tax is unfair and very short sighted. It fundamentally penalises those who work hard building up their business.
In fact I would go on to say that the new Dividend Tax is a de-motivator for entrepreneurs – which is just plain stupid.
This country should encourage entrepreneurship!
I’d urge Chancellor of the Exchequer Philip Hammond to look again at this tax burden and reconsider if it is truly appropriate.