Self Assessment - Dividend Tax - Payments on Account

[TheCyclingProgrammer]

The whole thing is a joke.

Dividends are payments that may or may not be made. Who can foresee their company profits with any degree of certainty, particularly in the current market? Any tax paid on dividends should be paid at the end of the tax period AFTER that dividend has been awarded, in a fair world.

HMRC want to collect tax as soon as possible - that's why most people are on PAYE and pay tax at the end of every month. In comparison people who pay most of their tax via self-assessment have far preferential treatment.

As things stand, we pay half the estimated tax bill for the year 2 months before it ends and the rest 4 month after it ends. That's not too bad, but as I said before it can be awkward for people with lumpy income who earn more in the second half of the year than the first. But as we can control the timing of our dividend payments, we can largely avoid this issue.

[Maslins]

Dividends are payments that may or may not be made. Who can foresee their company profits with any degree of certainty, particularly in the current market? Any tax paid on dividends should be paid at the end of the tax period AFTER that dividend has been awarded, in a fair world.

HMRC are no better than some junky waiting for their giro to come through so they can get a fix. Talk about living hand to mouth. "lend us a fiver until I get paid would you?".

There's a lot wrong in the above comment.

Even when in the payments on account (PoA) regime, you're basically getting 10 months of dividends before you pay any personal tax, so you're not paying tax in advance. As TCP says, you should know 10/12ths of your income before having to pay that PoA, so if at that stage you still have no clue what you'll earn, it suggests your bookkeeping needs work.

You're also in full control of when/how much you take in dividends, so can choose when/how much personal tax to pay.

Plus you pay less than the equivalent employee, who suffers all their income tax before they even get their pay.

[AtW]

The whole prepayment thing is a joke... but don't worry, they are fixing it with quarterly tax returns...

[oliverson]

The whole thing is a joke.

Dividends are payments that may or may not be made. Who can foresee their company profits with any degree of certainty, particularly in the current market? Any tax paid on dividends should be paid at the end of the tax period AFTER that dividend has been awarded, in a fair world.

HMRC are no better than some junky waiting for their giro to come through so they can get a fix. Talk about living hand to mouth. "lend us a fiver until I get paid would you?".

[chopper]

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.

[TheCyclingProgrammer]

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.

[Jessica@WhiteFieldTax]

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.

[Maslins]

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!

[TheFaQQer]

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:

you will be charged interest at the HMRC 2.75%

[DeadEyedJacks]

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

[TheFaQQer]

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)

[Lance]

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.

[Chart Accountancy]

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.

[DeadEyedJacks]

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