How to use a dividend tax calculator

There are several factors that inspire contractors to use dividend calculators, most frequently the desire to predict upcoming tax liabilities and how taking a dividend affects this, writes Patrick Gribben, Head of Client Services at Intouch Accounting.

Why use a calculator?

The most common reason why contractors would use a dividend calculator, that we see, is the ease by which a contractor can use the calculator to identify the amount of any dividend that should be set aside for future tax liabilities.

Another good reason to tot up your dividends and make use of a calculator is that there are four tax bands that could apply, ranging from the nil rate to the highest rate of 38.1%. For those contractors deciding not to appoint an accountant, who would be advising of the tax liabilities throughout the year, using a calculator every three months would help identify when your dividends exceed each of the thresholds.

However, next year’s paring back of the dividend nil rate shelter further highlights the need to keep on top of the dividends received and the tax likely to be due. Many contractors considered that the nil rate band was a permanent fixture. However, the law was carefully written to allow HMRC to not only reduce the band upper limit but also, many will be surprised to know, to also change the percentage rate. It’s a strange concept of having a nil rate band that could actually be increased above zero, but that’s how HMRC like to play the rules nowadays.

Codes & Years

When you land on the dividend calculator web page of your choice, the first thing you’ll usually see is usually a blank field marked ‘tax year,’ or a blank field marked ‘tax code.’

Your current tax code can be found on your payslips, if you get them from your accountant, or accessed via your personal tax gateway account. Normally it appears as a number followed by a letter. To use the correct number add a zero to the code, for instance a code of 1250L is actually 12,500.

Tax codes do change from time to time and you should use the calculator to reassess the amount of tax to be set aside following any change in your code.

To input tax year, you first need to work out what tax year you’re interested in working out dividends for. Let’s take April 2020, as an example. If you want to work out how much in dividends you want to take before April 2020, let’s say in October 2019 like this contractor, then you select the year as starting on April 6th 2019 and ending April 5th 2020 or 2019 – 2020.

Salary

Most calculators then usually present you a salary box. Very typically a contractor will have a low salary and rely more heavily on dividends as their main source of income. Tax works on a cumulative basis and dividends are always treated as the top slice of total income. Including your salary will allow the calculator to know you have other income that uses up parts of your tax free and basic rate tax bands when assessing the level of dividend tax.

Show me the money

Often, it’s now to hit the ‘calculate’ tab. The calculator will do its thing. It’s worth bearing in mind what’s happening here. Typically calculators will use standard assumptions and apply the tax allowances, bands and percentage rates for the selected tax year. If you were to change the tax year the dividend tax will change, as would be the case following a change in your tax code. It’s always worth checking the assumptions used to be aware of circumstances where the answer should be regarded as only an indication of the final liability.

Final considerations

One of the biggest mistakes made with dividend calculators is not including other income, in addition to salary, selecting the wrong tax year or using the wrong code. As referred to above, knowing how relevant the assumptions are is also a consideration when assessing the likelihood that the result is reliable.

Beyond this, and assuming you input the correct info into the fields, calculators are best used only as an indication of the tax to set aside. There’s no substitute for a human dividend calculation and so it’s always recommended to consider appointing an accountant, if only to look at your personal tax.