Reply to: Budget Day - No Need to Worry

[The Lone Gunman]

No "ex" about it, mate

I'm just saying that earnings from work, and return on working capital, are not the same thing. I'm not really judging whether the effective tax rate on them should be different, nor am I saying that contractors running Ltd Cos should refrain from legal methods of reducing taxes (I especially like the idea of working less myself). But re-classifying earnings from work as return on capital, when in reality the company is not a capitalist company, is essentially dishonest. As I said, the govt, asked for it. But it's wrong.

No mate the divvies are the divvies are paid from profit. I invested a small amount in a company with a profitable business model.

If I were working for someone else I would be earning circa 27K. My company income is going to be about 90K ignoring costs and expenses and stuff my company makes 63K which can then be seen as working capital or profit to be spread amongst shareholders. If we only got Divvies on what we put in originally then there would be no point starting a business.
It is not about how much you put into the pot it is about how much profit your business can make.

Alan Sugar started with 100 quids worth of car ariels and a barrer. Branson started with a few quidsworth of stock. Bill Gates started with very little too.

[expat]

If not paying NI is "morally" wrong, so is putting your savings into a tax free ISA's instead of a normal bank account, as the former avoids tax on the interest.

What a strange person you are expat. Or perphaps it's exprat?

No "ex" about it, mate

I'm just saying that earnings from work, and return on working capital, are not the same thing. I'm not really judging whether the effective tax rate on them should be different, nor am I saying that contractors running Ltd Cos should refrain from legal methods of reducing taxes (I especially like the idea of working less myself). But re-classifying earnings from work as return on capital, when in reality the company is not a capitalist company, is essentially dishonest. As I said, the govt, asked for it. But it's wrong.

[PerlOfWisdom]

If not paying NI is "morally" wrong, so is putting your savings into a tax free ISA's instead of a normal bank account, as the former avoids tax on the interest.

Or having a day off every week to reduce your tax bill.

[ASB]

IF that was the case then perhaps the government should have paid more attention when they drafted the legislation on taxing dividends at the time..that is of course assuming tax on dividends is derived from legislation!

Mailman

Way back when I incorporated there was a thing called the "investment income surcharge". This was 15%. It made paying dividends more expensive than paying salarys. (At the time NI was capped for both employer and employee - the uncvapped employer rate is a recent invention).

Also at the same time there was the "close companies deemed distribution rule". This basically stated that should you attempt to retain any profit you would be taxed as though you had declared it as a dividend.

Paying dividends only really becam cost effective with the introduction of independant taxation.

[DimPrawn]

If not paying NI is "morally" wrong, so is putting your savings into a tax free ISA's instead of a normal bank account, as the former avoids tax on the interest.

What a strange person you are expat. Or perphaps it's exprat?

[Denny]

John Prescott fell asleep during GB's speech.

[hyperD]

Was there something subliminal about an MP Rally?

[zathras]

the fact that paying some of the earnings from your work in a form that pretends to be other than earnings, just in order to avoid some of the tax that is due on earnings, is morally wrong.

What on earth has morals got to do with it. Paying yourself dividends would in fact not even be avoidance it would be tax mitigation. The law has always allowed one to arrange your affairs so as to pay as little as possible to the taxman.

The difference between Tax mitigation and tax avoidance is a simple one. Tax mitigation is taking your existing arrangement and paying the tax due. Avoidance is changing your situation.

So a person running a company who pays themselves lower wages and the rest of their income in dividends is using mitigation.

The person who creates a company, siphons income thru it and is paid partly in wages, partly in dividends is using tax avoidance.

Neither is illegal. What is illegal is tax evasion.

Morals have nothing to do with it.

Or are you saying the person with loads of kids, who refuses to go out to work and expects more from the hard-pressed taxpayer is more moral than someone who arranges their affairs so less goes to the taxman.

[PerlOfWisdom]

Income tax is mprally wrong

[expat]

eh?

Sorry if I wasn't clear.

Dividends are supposed to be paid as a return on capital: the capital that the company was formed in order to raise and exploit in the first place. If you have a company with £100 in share capital and a turnover of £400 a day, that's not a stunning return on capital: it's not a return on capital at all, it's a (just) reward for labour. So the money drawn from the company is income, not return on capital. So it is normal that it should be liable to income tax. And NICs are income tax.

I know that it's the government's own fault for preventing us from taking the correct status of self-employed, and allowing us the misleading status of company limited by share capital; and for not charging this particular income tax on all types of income; but that doesn't alter the fact that paying some of the earnings from your work in a form that pretends to be other than earnings, just in order to avoid some of the tax that is due on earnings, is mprally wrong.

[zathras]

No NI on divis then? Panic over!

Panic delayed you mean - he still wants to 'consult' on it

[Mailman]

There should be. That is the source of the abuse of dividends that has led to IR35. Dividends are supposed to be a return on investment, a reward for providing working capital: not a way of paying yourself part of your income free of some tax.

IF that was the case then perhaps the government should have paid more attention when they drafted the legislation on taxing dividends at the time..that is of course assuming tax on dividends is derived from legislation!

Mailman

[DimPrawn]

NI isn't tax (that's what Gordon tells us) and is levied on PAYE earning where it pays for our pensions and health (that's what Gordon tells us)

Dividends are distribution of company profits to shareholders. Why would it make any logical sense to put NI on them?

[DimPrawn]

eh?

[expat]

No NI on divis then? Panic over!

There should be. That is the source of the abuse of dividends that has led to IR35. Dividends are supposed to be a return on investment, a reward for providing working capital: not a way of paying yourself part of your income free of some tax.