Reply to: Office of Tax Complication

[Fred Bloggs]

It's a perfectly reasonable idea. People can still use a Ltd company, and can still retain funds in the company, but the most tax efficient way of extracting company money is taxed in the same way as a sole trader. A much better outcome than being tipped into inside IR35 with full employers and employees NIC.

Exactly. Turns the clock back to when a contractor was a sole trader. It makes a great deal of sense to go back to that instead of having a sham incorporation forced into you.

[Old Greg]

Stop giving British government departments ideas...

It's a perfectly reasonable idea. People can still use a Ltd company, and can still retain funds in the company, but the most tax efficient way of extracting company money is taxed in the same way as a sole trader. A much better outcome than being tipped into inside IR35 with full employers and employees NIC.

[Fred Bloggs]

Stop giving British government departments ideas...

Why not? Their own ideas are pretty useless. They need all the help they can get.

[SueEllen]

This is how contracting via a Ltd works in Ireland except you generally say the equivalent of sole trader NIC. It's a good system other than the low thresholds for higher rate tax (which is a general issue, not contracting specific).

Stop giving British government departments ideas...

[Old Greg]

https://assets.publishing.service.go...per_May_18.pdf

Page 19 onwards.

Yet more tinkering to destroy the entrepreneurial spirit in not-so-Great Britain.

"A more radical option would be to end the differential tax rates for dividend income. If all taxable income was taxed at the same rates, it would not matter how the personal allowance was used. Making this change would have the effect of increasing the amount of tax due from those who receive amounts of dividend income above the allowance. It would also impact on the taxation of profit extracted as a salary or as a dividend, from family owned companies"

I mean like which uneducated jobsworths come up with this kind of stupid unworkable idea.

This is how contracting via a Ltd works in Ireland except you generally say the equivalent of sole trader NIC. It's a good system other than the low thresholds for higher rate tax (which is a general issue, not contracting specific).

[Hobosapien]

Any government that merges NIC and income tax knows they would shoot themselves in the foot as it would reveal the real amount of tax people pay.

That would still only be the tip of the tax iceberg.

Just think of how many different taxes and duties are paid for instance between gross pay by an employer and spending some of it on a pint down the pub (alcohol duty and VAT), especially if you drove to the pub (fuel duty and vat, road tax).

One way or another they claw back most of what you earn. If they really wanted to simplify things they could require the employer to pay them first and they give you what's left. Pocket money for being a nice net contributing citizen.

[TheCyclingProgrammer]

Just to highlight the difference here, with a £100k gross profit:

https://www.uktaxcalculators.co.uk/d...ary-result.php

Effective tax rate for the dividend low salary route: 32%
Full salary: 41%
Sole trader: 33%

Above numbers are rounded. Important to note how little difference there is between the sole trader and dividend route in terms of tax. That’s because the employer NI in particular makes a big difference! The amount that most employees probably aren’t even aware of.

[TheCyclingProgrammer]

The company issuing the dividend pays CT, the recipient does not. You're conflating the tax liabilities of two entirely separate legal entities.

This might be technically true but in the context of small owner run close companies like ours it seems like an overly pedantic distinction to make. It’s not a case of conflating two different things but simply looking at the true picture.

An employee on £100k is going to have income tax and NI taken out of their gross pay before it reaches their pocket. And that’s not accounting for the employer NI on top.

A contractor Ltd that turns over £100k and pays out all retained profits in the same year is going to have corporation tax and dividend tax taken out before it hits their pocket.

It seems like an entirely fair comparison to make to me.

[TheCyclingProgrammer]

You might not like it but I’m not sure why you think it is unworkable.

You have to look at it in the context of the public perception of tax dodgers, it is hard to justify paying a high rate of 32.5% against 40% on PAYE.

On the contrary, it’s easy to justify because the 32.5% is paid on profits that have already suffered 19% corporation tax.

Once again this proposal seems to entirely miss the point that once you account for corporation tax the overall tax difference is minimal (the dividend allowance gives dividends a small advantage) unless you take into account national insurance. It’s NI that’s the major factor here.

But why should dividends be chargeable to NI? NI, especially employer’s NIC, is effectively a tax on employment. Dividends are supposed to reward shareholders for their investment and/or entrepreneurialism.

I completely agree with OP. If you break it down there isn’t much difference. We do of course have the flexibility to retain profits and not incur further higher rate income tax unless we need to. But equally our war chests serve a very important purpose - they are there to keep us afloat when business is bad.

[SueEllen]

Any government that merges NIC and income tax knows they would shoot themselves in the foot as it would reveal the real amount of tax people pay.

[Waldorf]

Um, because you've paid CT already on it? That's why it's called a dividend tax credit.

I can however see NICs being added to dividends payments at some point.

I have no doubt the government will tinker and make things worse for all, but it's not going to be "simplification" as per the dictionary definition.

The dividend tax credit was abolished a few years ago. Part of the argument for increased tax on dividends is due to the reduction of CT, I think I can recall CT at 24% for small companies so as it falls to 17% the dividend tax is a means to recoup some of this.

Remember NIC is not payable on dividends but there is an argument that dividends do not warrant a much lower rate of taxation than PAYE.

I agree the whole tax system is a mess and simplification starting with a merger of income tax and NIC would be a great start.

[ladymuck]

Um, because you've paid CT already on it? That's why it's called a dividend tax credit.

The company issuing the dividend pays CT, the recipient does not. You're conflating the tax liabilities of two entirely separate legal entities.

I agree it's double taxation but then where would it end? At present a PAYE worker is taxed at source on their income, then they pay VAT on purchases, fuel and alcohol duty, insurance premium tax, duty on air travel if they dare to want to go abroad for a holiday. It's always tax on top of tax.

True tax simplification would shed a whole lot of light on stealth taxes and no-one has the political balls to do that.

[ChimpMaster]

You might not like it but I’m not sure why you think it is unworkable.

You have to look at it in the context of the public perception of tax dodgers, it is hard to justify paying a high rate of 32.5% against 40% on PAYE.

Um, because you've paid CT already on it? That's why it's called a dividend tax credit.

I can however see NICs being added to dividends payments at some point.

I have no doubt the government will tinker and make things worse for all, but it's not going to be "simplification" as per the dictionary definition.

[WTFH]

I mean like which uneducated jobsworths come up with this kind of stupid unworkable idea.

Angela Knight, ex Tory MP, former head of the British Bankers association.

She was the chief executive of the BBA for a few years and then stepped down just after the LIBOR scandal broke.

[Waldorf]

You might not like it but I’m not sure why you think it is unworkable.

You have to look at it in the context of the public perception of tax dodgers, it is hard to justify paying a high rate of 32.5% against 40% on PAYE.