Corporation tax and Dividends

[unixman]

It's a popular misconception that Ltd. company contractors enjoy great tax benefits over permanent employees. Even some contractors believe it. Nonsense, unfortunately. The element people forget is of course corporation tax, that bites 19% out of everything bar the first £12,500.

The calculations are somewhat involved but this 2019 article does it commendably well, comparing permy vs divy-paying contractor tax rates across a full range of income.

Interestingly, permies and contractors pay about the same overall tax rate, with the permy having a slight advantage as pay increases over £50,000. It's a picture which ought to be more widely publicized. While things might have been different in 1994, there are no tax advantages to contracting and the government ought to stop pretending otherwise, portraying contractors as under-taxed etc.

Anyway Great article: accurate, rigorous with no BS.

Jim

[eek]

We've said for years that the IR35 battle is over Employer NI which that article completely ignored so this really isn't news.

[jamesbrown]

Er, so what do you think happens to employee's wages when large companies pay more corporation tax? You can't factor CT for contractors and ignore it in the tax burden of employees, it's just that the calculation involves an extra level of indirection.

[jamesbrown]

Also, not £12,500 because, of course, business expenses and choice of salary.

[ladymuck]

We've said for years that the IR35 battle is over Employer NI which that article completely ignored so this really isn't news.

You didn't scroll down far enough?

Why IR35 isn’t the answer to HMRC’s prayers

Though the difference in tax take from employees and contractors is negligible, contractors have long attracted unwanted attention from HMRC in the form of IR35. However, curiously, the elephant in the room is employer’s NI.

Employer’s NI is paid at a rate of 13.8% by the employer on top of the salary paid to an employee. Firms do not pay employer’s NI when they hire contractors, which has resulted in what HMRC perceives to be a shortfall in contributions to the Exchequer.

Granted, it doesn't really go into the full depths of this.

As an argument against the mantra of "doing the same job, should pay the same tax", the article is a decent stab at an explanation but I agree that using CT is conflating the individual and company tax positions.

[jayn200]

Didn't read it but as stated it's about employer NI and also about the ability to tax plan a bit. You can choose when to take out your money.

Smart contractors only take out dividends at basic rate and the rest either stays in company until exit via ER, reinvested in something else, or goes into a pension, or combination of all 3.

There is a definite advantage and I honestly think it should be extended to employees. Employees should have a vehicle (other then pensions) to defer tax liability. It would level the playing field a lot.

[hugebrain]

Anyway Great article: accurate, rigorous with no BS.

Jim

Except it’s rubbish and doesn’t shown the 60% income tax rate (+ national insurance) at £100,000+

[Lance]

Not really a great comparison. No pension for a start.
And what contractor goes into the higher rate? Surely everyone just keeps the retained profit in the company as a war chest?
And it fails to consider that a contractor gets paid a LOT more than an equivalent permie.

It reads like a puff piece about hard done to contractors.

[ladymuck]

Some do go into higher rate by choice, e.g. if withdrawing funds for personal investment / use elsewhere. Not everyone is focussed on keeping everything under a set limit and so plan their finances differently.

I will draw what I want / need from my company and if I have to pay more tax, so be it. I'm not going to refuse to live my life because it might cost me more in tax.

[Lance]

Some do go into higher rate by choice, e.g. if withdrawing funds for personal investment / use elsewhere. Not everyone is focussed on keeping everything under a set limit and so plan their finances differently.

I will draw what I want / need from my company and if I have to pay more tax, so be it. I'm not going to refuse to live my life because it might cost me more in tax.

You choose to pay more tax or not as your circumstances/desires fit. A permie doesn't have that option.