Personal Allowance Less dividend tax

Hi all,

I'm new here and just looking for some advice.

I've had the annual letter through from HMRC regarding Tax code notice.

It states Total Tax free amount £9702 and tax code 970L

I Pay myself a basic £830.00 per Month and last year i took a dividend of £4995.00.

What i would like to know is why has my tax code changed? i asked my accountant and they said

it is because i received a Dividend on your last tax return and they are taxing you at source on this. This will always be the case until you don't receive a Dividend on your tax return.

Is this correct, i have no accountancy knowledge, but i thought i was allowed to earn up to £11500 without paying income tax and i could also take a dividend up to £5000 anything over the £5000 i would pay 7.5% or have i got this really wrong and my accountant is correct.

Thanks for any advice

  • You are right with your understanding of the tax free personal allowance, dividend allowance and tax rate for 2017/18.  But from 2018/19, the dividend personal allowance reduces to £2,000 which would mean if you have no remaining personal allowance and receive a dividend of the same amount in 18/19, £2,995 would be taxable at 7.5%. 

    As your accountant says HMRC have adjusted the tax code is to take account of this for the new financial year and assuming you continue to receive the same level of dividend.  That said it seems a hefty adjustment given you won't have used all of your personal allowance against your basic income if it remains the same (£9,960 pa vs personal allowance of £11,850), and my understanding is that the unused personal allowance can be offset against the dividend income in addition to the dividend allowance of £2k.  Do you have underpaid taxes from previous years as that could be another explanation?

    Personally I would however call HMRC / number on the top of the coding notification letter and and ask them to confirm if this is the case for your own peace of mind and query the size of the adjustment and whether the unused PA is also being allocated against dividend income (it may not be).