Self Assessment - Dividend Tax - Payments on Account
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    Question Self Assessment - Dividend Tax - Payments on Account

    OK,
    So have done first draft of personal self assessment tax return.
    2K to pay in Dividend tax no surprise there.

    Payments on account of 2K for tax on possible future dividends,
    that's a bit of a surprise!

    Given the ongoing economic uncertainties for the UK and contractors,
    I have no idea what dividends I might want or be able to declare during 2017-18.

    So reducing payments on account would not seem unreasonable,
    possibly even to nil, as a conservative approach to managing cashflow.

    Does anyone have real, personal experience of whether and in what circumstances HMRC
    would apply penalty interest should the eventual dividends and consequent taxation be higher
    than the payments on account?

    TIA

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    Ideally, you should make a realistic forecast of what dividends you expect to receive plus a small buffer. If you are confident that you will not withdraw this level of dividend, you can reduce your payments on account accordingly. If you end up receiving more dividends, you will be charged interest at the HMRC 2.75%. If you overpay tax with your payments on account, HMRC will send you a refund.

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    Quote Originally Posted by DeadEyedJacks View Post
    OK,
    So have done first draft of personal self assessment tax return.
    2K to pay in Dividend tax no surprise there.

    Payments on account of 2K for tax on possible future dividends,
    that's a bit of a surprise!

    Given the ongoing economic uncertainties for the UK and contractors,
    I have no idea what dividends I might want or be able to declare during 2017-18.

    So reducing payments on account would not seem unreasonable,
    possibly even to nil, as a conservative approach to managing cashflow.

    Does anyone have real, personal experience of whether and in what circumstances HMRC
    would apply penalty interest should the eventual dividends and consequent taxation be higher
    than the payments on account?

    TIA
    You're worried about a 2k POA? Seriously?
    You can reduce the POA easily enough. There is a link on the HMRC SA online portal. If get it wrong it could cost you more. And if you do have less tax to pay next year then you get the money back.
    If a 2k variation year on year is an issue for you then go back to perm I think.

    I reduced my POA in january to just over 3k but I already knew I wasn't going to take any more divis that tax year.
    Last edited by Lance; 25th April 2017 at 08:45.

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    Quote Originally Posted by Lance View Post
    And if you do have less tax to pay next year then you get the money back.
    Plus interest, IIRC (not at the same rate that HMRC charge you, obviously)
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    As I said "Does anyone have real, personal experience " I know the book theory.
    And Yes due to agency default cashflow is not what it might be.

    Pragmatically earning 0.5% from HMRC on overpayment is not great,
    Paying them 2.75% on underpayment is OK, as can get 3% leaving it in current account.

    But in practice when does HMRC apply this interest for under estimation?
    Real experiences only please

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    Quote Originally Posted by DeadEyedJacks View Post
    But in practice when does HMRC apply this interest for under estimation?
    Real experiences only please
    In my real world experience, every time.

    And as per post 2:

    Quote Originally Posted by Chart Accountancy View Post
    you will be charged interest at the HMRC 2.75%
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    I've never seen HMRC charge a penalty where someone reduces payments on account and then ends up with a liability higher than the reductions would have suggested. They will charge interest though.

    I imagine the penalties are just there as an option for those who very clearly knew full well they'd have a big tax bill, and potentially repeatedly do the same thing each year as maybe they can get a better return on the money than the interest HMRC charge. Not to catch someone who ends up having a slightly better year than they anticipated.

    I'd certainly be careful doing it 2+ years running though, the argument of "oh what a pleasant surprise my income was that high" would start to wear thin!

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    Quote Originally Posted by DeadEyedJacks View Post
    As I said "Does anyone have real, personal experience " I know the book theory.
    And Yes due to agency default cashflow is not what it might be.

    Pragmatically earning 0.5% from HMRC on overpayment is not great,
    Paying them 2.75% on underpayment is OK, as can get 3% leaving it in current account.

    But in practice when does HMRC apply this interest for under estimation?
    Real experiences only please
    Real experiences?

    Penalty interest is reserved for enquiry and major compliance work. In normal circumstances - 99.99% of the time - it does not apply to POA adjustments.

    The "penalty" for over egging a reduction in POA is interest charged back to the original POA due date rather than the normal self assessment due date.

    Eg 16/17, normal SA due date 31/1/18, normally interest runs from then, but if your POA has been reduced excessively interest is charged back to 31/1/17 and 31/7/17

    In 31 years of accountancy, I've never seen a penalty raised for over reducing POAs, nor compliance activity stemming from it.

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    Quote Originally Posted by DeadEyedJacks View Post
    Given the ongoing economic uncertainties for the UK and contractors,
    I have no idea what dividends I might want or be able to declare during 2017-18.
    Payments on account always relate to the current tax year and your first one isn't due until the end of Jan 2018, by which point you should have a much better idea how much tax you'll be paying as there will only be a few months of the tax year left. If you stay under the higher rate threshold it will be the same as 16/17 and your payments on account should be about right.

    So wait until the beginning of Jan before deciding to reduce your payments on account. There's no need to do it now. Because generally speaking, most of us will be paying around 2k in tax each year on salary + basic rate dividends, its easier IMO to just budget for the 1k payment on account every 6 months - the simplest way to do this is to set aside the right amount of tax every time you pay a dividend.

    The only time payments on account can cause an issue with personal cashflow is if you tend to pay a big dividend at the end of the tax year, which will be after your first payment on account is due. If you prefer to pay an annual dividend it would be better to do it at the beginning of the tax year so you'll have your tax money to hand already.
    Last edited by TheCyclingProgrammer; 25th April 2017 at 11:41.

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    HMRC have added the estimate for my 2017/18 dividend tax into my 2017/18 tax code, so it should all be paid through PAYE. They're not having two bites of that particular cherry, so no Payment On Account will be due.

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