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    Default Question about income tax on dividends

    Hi everyone - hope someone can help...

    My accountant has done my personal tax return, and due to the new 7.5% dividend tax I owe about ~£1500 extra in income tax from 2016/2017. As expected, I have to pay this by Jan 2018.

    However, what my accountant has also said is that I need to pay some of my 2017/2018 income tax liability in this current year as well (half in Jan 18, and half in July 18). He has calculated my liability as the same as 16/17, and said that if the liability is different from last year, then I will make up the shortfall/add the extra afterwards.

    His exact words were:

    Additionally, the above 2016/17 liability [being in excess of £1,000] means that you are required to make 2 further payments on account of any liability that you may have to pay for the current 2017/18 income tax year - totalling the identical sum of your 2016/17 liability.
    Does that sound correct? i.e. that I would pay the income tax on 17/18 before the end of the 17/18 tax year?

    Many thanks!
    Lou

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    Payments on account are mandatory where your income tax liability exceeds £1,000.

    HMRC calculate the liability as being 50% of the amount due for the tax year preceding.

    If you think that your income is likely to be significantly lower in 2017/18 than in 2016/17 then you could have these payments on account reduced but should be careful when doing so. If you reduce the payments on account and then end up owing more tax than the payments on account cover HMRC will charge you interest on the difference and may impose penalties.

    Also, although you now have a liability to settle on dividend income where your overall income remains within the basic rate threshold, you would actually have to take more income to hit the same levels as for previous years due to the fact that the notional tax credit was removed at the same time as the introduction of an actual rate of tax on these dividends. The upshot is that you certainly shouldn't be any worse off as a result.

  3. #3

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    Ditto the above.

    My first accountant told me to apply to reduce payments on account to zero each year. This I dutifully did for circa 10 years until all of a sudden I was being hit with late payment interest (it only came to about £7) because I wasn't making payments on account.

    A quick chat with the tax office revealed the duff nature of the advice I had been given on first incorporating all those years ago.

    I was lucky they didn't apply penalties too.
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    It's correct it is called payment on account, they base it on what you will pay this year or have previously paid and then you pay half upfront. It's how HMRC want it done so there's no way you can avoid doing it.
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    And it also boosts tax take in January so HMG can put out crappy headlines like "budget surplus exceeds target" and pat themselves on the back for doing absolutely feck all
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    Your first payment on account will be due 9 months into he tax year and the second one nearly 4 months after it ends so neither is really being paid “in advance” as such.

    There’s not much else to add to the above posts other than to say that if you set aside tax from your dividends as you pay them and try to pay them on a regular schedule that should ensure you have the money for the payments on account when they become due.

    What tends to cause a problem is if you have lumpy income and take most of your income after the first POA date.

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    Default Thanks!

    Thanks a lot for clarifying that - much appreciated!!

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    Quote Originally Posted by ladymuck View Post
    Ditto the above.

    My first accountant told me to apply to reduce payments on account to zero each year. This I dutifully did for circa 10 years until all of a sudden I was being hit with late payment interest (it only came to about £7) because I wasn't making payments on account.

    A quick chat with the tax office revealed the duff nature of the advice I had been given on first incorporating all those years ago.

    I was lucky they didn't apply penalties too.
    You are allowed to reduce your payment on account to whatever level you want to without incurring penalties.

    If you reduce it to a level that is below the actual amount the following year, then they will charge you interest on that amount.

    Even if you expect to pay nothing the following year, reducing the payment to zero is risky as you'll be charged interest if you get it slightly wrong - I reduced mine one year down to two payments of £50 just in case and then I got the money back when I didn't need to pay on account that year.
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    Quote Originally Posted by TheFaQQer View Post
    You are allowed to reduce your payment on account to whatever level you want to without incurring penalties.

    If you reduce it to a level that is below the actual amount the following year, then they will charge you interest on that amount.

    Even if you expect to pay nothing the following year, reducing the payment to zero is risky as you'll be charged interest if you get it slightly wrong - I reduced mine one year down to two payments of £50 just in case and then I got the money back when I didn't need to pay on account that year.
    The original advice received was to zero it out every year. It was only recently that they started to charge interest, so I got away with it for a good while.

    I should have qualified my penalties comment - not that HMRC will apply them but more my assumption that I'm surprised they don't
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    It used to make sense to reduce your payments on account to nil when you occasionally took a large dividend that pushed you into the higher rate but had no plans to in the following tax year.

    With the new dividend tax however, most people who take salary+divs up to the HR threshold will regularly have approx. a £2k tax bill each year so you may as well get used to budgeting for paying around £1k twice a year for the foreseeable future.

    I don't think HMRC would impose a penalty if you reduce your payments on account in good faith but ended up with a higher than planned tax bill, but you will pay interest. Getting it wrong frequently may raise eyebrows.

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