There are two possible reasons, one is that your income has increased significantly in the year, and the other, more likely explanation is that the way tax is paid on dividends has changed in a very big way recently. We blogged about this way back in October 2015 when the announcement was made and we have made a big thing about this in our recent webinars and one-to-one tax planning sessions, but it does seem that the message hasn’t been getting through to some contractors – not our clients I hasten to add.
Before the changes, if you were a basic rate tax payer, the corporation tax your company paid, along with the notional 10% tax credit everyone received, would cover any personal tax payable on any dividend income. Effective from 6th April 2016 (and therefore coming to prominence now when your self assessment return for 2016/17 is being prepared) the notional tax credit was abolished and new tax rates for dividends were introduced. These are:
In practical terms, this means that for most contractors or small company owners, tax will be paid on dividend income as follows:
The Treasury’s stated reason is to equalize the tax paid by company owners, who are able to pay dividends, with those who pay tax under PAYE: the additional tax on dividends, when added to the Corporation Tax which the company pays on the profits, is more or less the same as if it was paid as a salary.
Before the rule changes, if you were taking £43,000 from your company in the correct mix of salary and dividend you wouldn’t pay any additional tax at all, but now you’d pay £2,025
So, if you’re not used to getting a personal tax bill and you’re being told that you’ve got tax to pay in January 2018, this is very probably the reason.
These new rules have obviously caused problems among contractors and small business owners, but they also present tax planning opportunities. We’re happy to help anyone who is keen to learn how to minimize the impact.