Reply to: Dividends Tax

[LondonManc]

The effect us. Yes.
But they are not because of us.

They'll help us more because the big boys worm their way out of CT anyway!

[Lance]

How are corporation tax cuts "nothing to do with us"? We run limited companies and would also benefit from CT cuts, obviously!

The effect us. Yes.
But they are not because of us.

[TheCyclingProgrammer]

Why?
You're suggesting that the treasury would try and make new tax changes fair to the likes of us. That's pretty optimistic.

No I'm not, I'm suggesting the exact opposite. If corporation tax rates decrease it would in effect cancel out the dividend tax for many contractors.

Hence, I'd expect an increase in the dividend tax rate as corporation tax drops to ensure we still effectively pay the same overall tax rate. If they drop CT rates without increasing the dividend tax to compensate they'll be shooting themselves in the foot.

How are corporation tax cuts "nothing to do with us"? We run limited companies and would also benefit from CT cuts, obviously!

[Lance]

I'd expect the dividend rates to increase in line with CT decreases.

Why?
You're suggesting that the treasury would try and make new tax changes fair to the likes of us. That's pretty optimistic.

The dividend tax hike was purely to hit us (it's what I'd do if I was chancellor). CT tax cuts are nothing to do with us and everything to do with big business.

Anyway. With Gideon gone I'd say that any CT tax cut is pretty speculative now. We'll have to wait till Autumn.

[northernladuk]

Is that what your accountant told you???

No. I know I'm from the North

[AtW]

Suits us here in the North nicely.

Is that what your accountant told you???

[northernladuk]

Yes if you are poor then there is no tax hike at all. Nothing to worry about

Suits us here in the North nicely.

[AtW]

As I said, there's a bigger impact if you go into higher and additional rate tax but the impact on those (the majority?) who stay below the threshold is not that severe at all.

Yes if you are poor then there is no tax hike at all. Nothing to worry about

[TheCyclingProgrammer]

For now. Who do you think will pay for the lower CT rates? As of 16/17, 27.5% is correct.

No it isn't, as illustrated earlier. You're not accounting for the fact that CT applies to the gross profit, the dividend tax applies after the reduction of CT and the £5k allowance, or the personal tax threshold.

Somebody taking £11k salary and £32k in dividends will need to have a gross profit of £40k (£51k turnover if you add back the salary and ignore other expenditure) and will pay £8k corporation tax and £2025 in dividend tax, giving an overall take home of just under £41k, which is 78.5% or an effective tax rate of 21.5%.

Anyone going into the higher tax band will be paying 32.5% instead of 22.5% (of the grossed up amount) which does represent a significant increase although as you will no longer be grossing up you can effectively take more before you hit the additional rate threshold than before.

An extra £10k dividend into the higher rate would have increased your tax bill by £2500 last year (and moved you £11,111 closer to the additional rate threshold) and this year will cost you £3250, so an extra 7.5% in real terms.

Nobody knows what will happen in the future but yes, I'd expect the dividend rates to increase in line with CT decreases. This should in theory be neutral but may affect your overall take home if the upper rate threshold doesn't increase in step with those changes.

[Fred Bloggs]

Not sure if this is what you are getting at, but the reduction in CT rates applies to all companies. There is no small profits rate anymore.

And as I pointed out earlier, if you stay below the higher tax rate threshold the overall tax rate is more like 23%, not 27.5%.

For now. Who do you think will pay for the lower CT rates? As of 16/17, 27.5% is correct.

[TheCyclingProgrammer]

"Additional" rate tax on dividends was 30.56% and now 38.1%: 25%+ increase in taxation. Considering the company pays corp tax as well the taxation burden is bigger than direct 45% income tax:

Income notional £1000 at 45% = £ 450 tax.

Company profit £1000 at 20% corp tax (£200), £800 remaining as dividends taxed at 38.10% = £304.8 tax + £200 = £504.8

At 30.56% tax take the combined tax was £444.48 - pretty much spot on 45% level, that was pretty fair.

Even if they drop corp tax to 15% then total tax take would be £473.85 - still higher than normal level of income tax. Obviously there is no national insurance, but these are dividends, they should not be taxed higher than income tax level.

That's really bad, for comparison Germany has got 25% flat rate tax on dividends.

As I said, there's a bigger impact if you go into higher and additional rate tax but the impact on those (the majority?) who stay below the threshold is not that severe at all.

[TheCyclingProgrammer]

Not sure if this is what you are getting at, but the reduction in CT rates applies to all companies. There is no small profits rate anymore.

And as I pointed out earlier, if you stay below the higher tax rate threshold the overall tax rate is more like 23%, not 27.5%.

[Fred Bloggs]

I expect Govt to "simplify" the tax system and align dividend tax rates with income tax rates, so there will be another big increase to totally reverse any reductions in corp tax that they may bring about.

Yes, that's possible.

[AtW]

Be careful here when talking about lowering corporation tax. The big cuts in corporation tax rate benefit only larger companies. The standard rate not long ago for larger companies was 28%. It seems this is heading down to 15% may be perhaps in this parliament by 2020. But, the sting in the tail, who is paying for the larger companies who will pay a lot less tax?

I expect Govt to "simplify" the tax system and align dividend tax rates with income tax rates, so there will be another big increase to totally reverse any reductions in corp tax that they may bring about.

[Fred Bloggs]

Be careful here when talking about lowering corporation tax. The big cuts in corporation tax rate benefit only larger companies. The standard rate not long ago for larger companies was 28%. It seems this is heading down to 15% may be perhaps in this parliament by 2020. But, the sting in the tail, who is paying for the larger companies who will pay a lot less tax?

It's you and me. For a typical FTSE 100 company shareholder to pay any dividend tax at all he needs to hold maybe ~£200k of shares outside of an ISA or a SIPP wrapper. And the FTSE100 company will benefit directly from the huge reduction in corporation tax.

But for us, who take a large proportion of our remuneration as dividends we're paying 7.5% tax after just the first £5k. A total tax take on small companies/owners of 27.5% versus the proposed 15% for big companies. And would Ladbrokes give you odds against the dividend tax increasing in the next few years? No. Soon that 7.5% that you aren't worried about will become 10, 12.5 even 15%. And it is all to save GSK, BAE Systems, Rolls Royce, HSBC etc... corporation tax.

Nice one Mr Chancellor.