In advance of the new 2016/2017 tax year HMRC have for the last few months been issuing tax codes to be used for employees for the new tax year.

Normally most individuals would receive their full tax free personal allowance via their tax code.

HMRC can adjust this tax code for certain individuals, reasons for an adjustment can include additional tax relief for employment expenses, receiving taxable benefits, having opted to pay tax on other income via PAYE or paying outstanding tax from previous years.

A surprise change directors of limited companies are seeing in their coding notices is a deduction labelled ‘dividend tax’.

In previous years basic rate tax payers have had no personal income tax to pay on dividends received. With the introduction of the new 7.5% dividend tax a much larger number of directors will see themselves with a personal tax bill to pay.

A typical director receiving income in 2016/2017 up to the higher rate threshold, i.e. taking salary equal to the personal allowance (£11,000) and dividends of £32,000 would be liable to pay dividend tax of £2,025. In previous tax years dividend income up to the higher rate bracket would have attracted zero tax.

Dividend tax has always been paid as part of self-assessment with the amounts being due 31st January following the end of the tax year. By HMRC including this deduction in the tax code it would seem HMRC are trying to accelerate the collection of this tax, by doing so not only would the taxpayer be paying up to 20 months early but the company would have a greater administration burden of making regular PAYE payments to HMRC. Additionally, as the final dividend for the 2016/2017 tax year will not be known until 12 months down the line any dividend tax paid in the year will be an estimate only. If requested HMRC will remove any dividend tax adjustments from tax codes allowing individuals to continue paying their dividend tax as part of self-assessment.

Other changes being seen in tax codes is the removal of tax code adjustments for interest income, with the introduction from 2016/2017 of the Personal Savings Allowance means no tax on this type of income will be due up to £1,000 of income for basic rate taxpayers and £500 for higher rate tax payers. Finally a further recent change is the availability for employers to payroll most benefits in kind removing the need for tax code adjustments for these benefits.

With the various changes outlined above getting the right tax code is crucial if you want to avoid paying too much or too little tax requiring either a further payment later or a long wait for a refund. Dividend tax is a new tax from 2016/2017 onwards for many contractors and freelancers, getting the timing of when this is paid and the amount to pay right from the outset is essential to understanding how net pay will be affected.

Here at Gorilla, our specialist contractor accountants will provide you with unlimited support for all your tax related queries and you’ll even get a same day response if you contact us before 3pm under our client service guarantee. In addition, your personal tax return is included within our all-inclusive package for just £85 + VAT per month! If you’re interested in a FREE trial of our online bookkeeping software, do not hesitate to contact us on 0330 024 0406.