We’re constantly being asked at this time of year by clients submitting their annual returns – why their income tax bill is so much higher than last year – so here’s a reminder of why your tax bill may be higher.

Dividend Tax

In April 2016 the new Dividend Tax was introduced.

This hits dividend income in the tax year 2016 / 2017 which appears on the self assessment due to be filed by 31 January 2018.

The first lot of dividend tax will be paid on 31 January 2018.

The changes meant that, whereas before if you were a standard rate taxpayer no extra tax would be due on dividends, now you would need to pay extra tax.

The first £5,000 of dividend income is tax-free.

Note the plan is to reduce this tax-free dividend income allowance to £2,000 from April 2018.

After that, dividends are taxed at the following rates:

  • Dividends falling within basic rate tax – tax at 7.5% of the dividend received is due
  • Dividends falling within higher rate tax – tax at 32.5% of the dividend received is due
  • Dividends falling within the additional rate of tax – tax at 38.1% of the dividend received is due but remember that for income over £100, 000 your personal allowance starts to get restricted

In reality this means an extra 7.5% of tax is due across all tax bands.

Payment on Account

Not only is there additional tax to pay but you may also have to make a Payment On Account towards your tax bill for 2017 / 2018 (the current year).

A Payment on Account (POA) is a contribution towards your tax bill for the current tax year. POAs get made on 31 January and 31 July if your tax bill is more than £1,000.

The amount is calculated by looking at your previous year’s tax bill. POAs made get deducted from the tax owed on your next self-assessment; so you are not paying tax twice.

What this means, in reality, is that, for the tax year 2017 / 2018, you will pay the additional tax.

If you want this explained in greater detail feel free to call us for a free consultation on 07970 298253.

Happy New Year!