Directors will pay

By Huw Jones

Active-Business-BYOD3-Blog_2The Treasury expects to collect £2.6 billion in extra tax because business owners have accelerated dividend payments to avoid a looming tax hike, says the Financial Times. The tax rate on dividends in excess of £5,000 a year rose by 7.5% on April 6th 2016, and many company owners chose to take higher dividends before this date to reduce their tax bills.

This does however lead to two unintended consequences. The first is a higher tax bill. By taking additional dividends in the 2015/16 tax year directors will now have an increased tax liability. If they are higher rate tax payers this liability will be 32.5% of the additional dividend. This will need to collected in January 2017.

The second unintended consequence is an even higher tax bill. HMRC requires that payments on account are made to cover the anticipated tax bills for next year (based on this year’s income). Increasing dividends in 2015/16 will probably equate to an insufficient payment on account for 2016/17.

In both these regards HMRC is keen to get its hands on this extra revenue. If the payment on account was insufficient to match the actual tax bill it expects the difference to be paid by January 2017. In addition it will also expect 50% of the new tax bill (based on the increased dividends) to be paid at the same time (on account for the 2016/17 tax year). The remaining 50% payment on account account to be paid in July 2017.

It is possible to apply to HMRC for a reduction in the payment on account. This may well incur additional accountancy fees – which may well wipe out any tax saved from taking dividends early.

Taking dividends in 2015/16 to avoid increasing rates of tax in 2016/17 may mean directors will inadvertently pay more to HMRC.