The Government has responded to a petition against the forthcoming dividend tax hike. Here we explain why its response is factually wrong in so many ways.
Frauke Golding created a petition on the GOV.UK site earlier this month, asking the Government to reconsider its proposed dividend tax changes, which take effect from April 2016. The tax hike will cost a contractor earning £80,000 in dividends, and £8,000 in salary over £4,000 extra each year.
Once the petition received 10,000 signatures, the Government was compelled to provide a response, which it has done.
You can read the full response here.
Here, we examine the key parts of the response, and explain why the Government has it wrong on almost every point.
Lowering corporate taxation
As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.
No-one could disagree with this, although one could argue that the Treasury could raise even more funds by ensuring that all large companies who do business in the UK actually pay the Corporation Taxes they owe, rather than allowing corporations to channel their profits through complex offshore tax structures.
Employment Allowance and AIA
Owners of small companies will also benefit from a range of other measures announced at the Summer Budget, including an increase in the National Insurance Employment Allowance to £3,000 from April 2016 and a permanent increase to the Annual Investment Allowance to £200,000 from January 2016.
This is not true for many small companies. Those caught by IR35 were always excluded from the Employment Allowance, and from April 2016, companies, where the director is also the sole employee, are not allowed to claim the Allowance.
The Annual Investment Allowance (AIA) may well be ‘permanently’ set at £200,000, however, this is a big cut from the £500,000 limit which has prevailed since April 2014.
Misleading over higher rate tax band
They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016.
Successive Governments have been guilty of exploiting ‘fiscal drag’ to raise taxes whilst appearing to be benevolent to taxpayers. Over time, as incomes have risen, the number of individuals entering the higher rate income tax band has also increased. The higher rate threshold has not risen proportionately. The Institute for Fiscal Studies says that even by raising this threshold to £50,000 over the lifetime of this parliament, a further 300,000 people will be paying higher rate tax – 5 million in total.
Small companies have not had a Corporation Tax cut
it is not possible to continue to reduce the Corporation Tax rate without looking at the overall balance of the tax system, including taxation of dividends.
The main rate of Corporation Tax has fallen significantly in recent years – from 28% in 2009 to 20% this year. However, this is the rate paid by larger companies with high profits. Those making £300,000 or less per year have been paying Corporation Tax of 20%, or 21% since 1998. The rate of Corporation Tax paid by small companies has not been reduced in recent years, so why aren’t these companies protected from a ‘balancing act’ which should surely only apply to larger firms, based on these facts?
Fundamental misunderstanding of the contracting industry
Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed.
This single sentence demonstrates why this, and previous Governments, simply don’t understand how contractors work. This is a profession and a way of life, not some short-term ‘tax saving opportunity.’
Those who go it alone do not benefit from the perks enjoyed by many employed people. Contractors, in particular, take on a great deal of risk – if they don’t perform, they’re out of the door. They have no paid holidays, no sick pay, no pension plan, no free healthcare, no benefits whatsoever.
Almost all clients will only take contractors on if they are trading via a limited company (or umbrella scheme). Contractors don’t ‘choose’ to incorporate to avoid tax – this is simply how the business works.
The tax difference, which will reduce substantially following the new dividend tax change, is essential to not only promote enterprise but also to pay for the things listed above that many employees receive from their employers.
What happens now?
- If the petition reaches 100,000 signatures, then it will be considered for debate in Parliament.
- Read our complete guide to the April 2016 dividend tax change.
- Try our 2016-17 dividend tax increase calculator to work out how much the changes will cost you.
Written by James Leckie