All contractors should now be aware of the tax that will be payable on dividends. The new tax regime commenced on 6 April 2016 and dividends falling outside the dividend allowance will now be taxed at 7.5%, 32.5% and 38.1% depending on the level of personal income.
The additional tax on dividends should be collected through the self-assessment system and therefore should be collected on 31 January 2018, i.e. 31 January after the end of the tax year.
What have HMRC been doing? Affected taxpayers have seen their notice of coding adjusted for the expected amount of dividends and therefore the dividend tax that will be payable. On the coding notices it is referred to as “dividend tax”.
You can check whether this is the right amount of tax by calculating the tax you would have paid on last year’s dividends as included in your self-assessment tax return at the current dividend tax rates. Then compare this by multiplying the adjustment on you notice of coding by 20%. The amounts should be the same.
But can HMRC do this?
No, not without your permission. HMRC can only include such a deduction in PAYE codes if the employee does not object. In fact, you can object to any non-PAYE income tax being collected through your tax code. If you want to object and let your accountant work out the actual tax due after the year end with payment the following January, then call HMRC and asking for the dividend tax to be removed. The code should be amended and sent out.