Are you sure you have declared your company dividends correctly?
If you are a Company Director & Shareholder, you need to declare the dividends you receive from your company on your personal tax return so that you pay the correct amount of tax.
The tax free allowance is £1,000 in 2023/24 and then £500 in 2024/25.
Any dividends paid above these limits are taxable at your top rate: for basic rate taxpayers the dividend rate is 8.75%, for higher rate taxpayers it is 33.75% and additional rate taxpayers pay 39.35% on dividend income.
HMRC suspect many company owners have not been declaring their income from company dividends correctly so are sending out “nudge letters” encouraging people to come forward.
How do HMRC know?
HMRC have access to third party information that enables them to identify if income has not been shown on self-assessment tax returns.
One such source is data from Companies House & your company’s Corporation Tax Return.
HMRC can see where company reserves have fallen despite the accounts showing profits.
This indicates dividends & distributions may have been made, so if none have been shown on the shareholders’ tax returns HMRC become suspicious.
What should I do if I receive one of these letters?
As with all of HMRC’s nudge campaigns it is a fishing exercise.
If you do not receive company dividends or have correctly declared them then you should to respond to HMRC by telephone or email, but you might want to get some help, if that’s you let us know.
If you do not act they can open a compliance check into your tax returns. This can be a tortuous experience.
So, if you have or think you have undeclared income, HMRC offer taxpayers an online disclosure facility, the link for which is https://www.gov.uk/guidance/tell-hmrc-about-underpaid-tax-from-previous-years
This means you can own up & declare any previously undeclared income, calculate the tax owing plus interest and penalties.
You will need to pick a penalty rate depending on the circumstances of non-declaration.
Is it only dividend income I should declare on the online disclosure?
No, you should use the facility to declare any undeclared income for any tax year, or indeed any other undeclared tax due, including capital gains tax, inheritance tax and corporation tax.
What should I do if I have undeclared income but have not received a letter from HMRC?
You can still use the online disclosure facility.
It is better to make a declaration before HMRC contact you, because if you own up voluntarily the penalties will be lower than if HMRC find it themselves & throw the book at you.
