Dividend Tax: Game, Set, Match for Contractor Service Providers

Accountants of all shapes and sizes, are grappling with the task of how to avoid calculating the new dividend tax on their clients' dividends at the end of the company year. But, the dividend tax is a tax on income so make that a calculation at the end of each tax year? That will be difficult.

But it's been announced that all this has proven to be a futile exercise, because HMRC has simply taken the latest dividend to be reported, and then assumed the dividend tax amount due in 2016/17. So all directors' personal tax codes have already been adjusted to recoup the extra tax on a monthly basis, i.e. when the director's salary is paid.

This means directors who have historically taken a small salary from their companies and high dividends, will pay much more tax under PAYE than ordinary employees, and this is because in 2016/17. K codes are a real possibility for many company directors who have a standard tax code in the current tax year.

For example, in 2015 Joe's company accounts showed a £10,000 salary and a £30,000 dividend.

His tax code for 2016/17 will be issued like this;

  • Personal Allowance £11,000
  • Less dividend tax £11,250

And Joe's tax code will be K25

The beauty of this deal, as far as HMRC is concerned, is the lower the salary, the higher the dividend and the higher the director's personal tax code will be year on year. (That department's motto Non aliter quam felis excoriare rings very true.)

Even I have to admit that this seems a totally inconceivable idea. But what strikes me more is, how will accountants, particularly the many service providers that trade as accountants, explain the huge jump in tax deductions next tax year? And continue to justify their fairly high service charges?

Fortunately for our clients, as they took our advice and took a reasonable salary and lower dividends, the movement in their personal tax codes will be slight, and they will not suffer the same level of shock that will reverberate throughout the rest of the temporary labour market.

The way out - if there is one? Well, one way is to cancel out dividends in excess of the £5000 dividend allowance and pay a higher director salary under PAYE and then apply to have the tax code re-coded to the standard 1100L.

Another is to operate IR35, which is not very far removed from the first suggestion and Lo! HMRC it seems, wins the longest running battle in tax history. Game, Set, Match.

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The UK Labour Market is one of the most highly regulated sectors, can you compete? Freelancer, labour supplier , employer or contractor – we are here to help you to keep on top of the game! Register your details on our system...
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