Question, I am a contractor working through my own limited company and I take a combination of salary and dividends. I don’t have any other income outside of my company but HMRC have just sent me a strange tax code notice where they appear to be adjusting my tax code for dividends I had taken in the previous year. Is this correct and can I do anything about it?

 

dividend tax code

Answer:

Due to the changes to how dividends are taxed, which came in from April 2016, many people have income tax to pay on their dividends when they may not have done before.

For the 2017-18 tax year, in the circumstances of a simple contractor like yourself with no other income outside the salary and dividends from your company, the way dividends are taxed is as follows:

The dividend allowance means that an individuals first £5,000 of dividends are tax free.

Over and above this £5,000 the dividend income is taxed as follows:

  • If you have any un-used personal allowance (£11,500 for 17-18) then that element is tax free
  • Any dividends in the basic tax band (up to £45,000 for 17-18) attract a tax charge of 7.5%
  • Dividends above the basic tax band (£45,000 for 17-18) are charged at 32.5%
  • Additional rates of tax will apply at the upper tax band (£150,000 for 17-18)

For Scottish resident tax payers the higher tax band is £43,000 for 17-18, as opposed to £45,000.

These changes to dividend taxation are causing HMRC to issue some people with lower tax codes as they are attempting to capture the tax upfront which they believe will arise from dividends in the 16-17 tax year onwards.

If this has affected you then you can call HMRC to ask them to adjust your tax code to remove any estimated tax on your dividends as you will account for this through your personal tax return anyway.

HMRC can be contacted through the self assessment helpline here or you can fill in an online PAYE tax code query form here.

Also bear in mind that you are likely to be drawn into the payments on account regime for self assessment.

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