As more and more people decide by choice or otherwise to work for themselves, rather than become traditional employees, the difference in the way groups of workers are taxed has become front page news.
Need to compare like with like
Unfortunately, when Government officials and news organisations make statements relating to the disparity between the taxes paid by employees and the ‘self employed’ / company owners, they rarely compare like with like.
When making comparisons, commentators rarely consider the work-related expenses contractors have to fund themselves, which permanent staff take for granted – such as pensions, accountancy fees, insurance, training, time off for holidays / illness / time between contracts.
More seriously, however, when it comes to the tax rates paid by different types of worker, some prominent news organisations are simply printing nonsense.
“Company owners pay just 20% tax on their earnings!”
How often have you heard the statement “people working through their own companies pay just 20% tax”?
See this Guardian article for a classic example:
“Professionals in the media, IT and nursing set up a company to cut their tax to about 20% by offsetting a series of expenses against their earnings.”
Last month, highlighting the use of limited companies, this article in the Daily Mail stated:
“…the arrangement allows workers to be taxed as a company rather than as an individual. That attracts corporation tax of around 20 per cent instead of income tax of up to 45 per cent. Beneficiaries also avoid national insurance and can receive a slice of any dividends tax free.”
Earlier this month, the Daily Mirror – while shaming BBC ‘stars’ for their high levels of remuneration – claimed that “their salaries are routed through personal service companies so they pay only 20 per cent corporation tax.”
Press reports are disingenuous at best
The problem with these press stories, and dozens like them, is that the headline-grabbing ‘20%’ tax rate refers to the Corporation Tax paid by companies on their profits (the current CT rate is actually 19%).
However, simply mentioning the corporate tax rate and neglecting to mention further taxes paid on income by limited companies is disingenuous.
As our readers will know, once company income has been subject to Corporation Tax, any retained profit can be drawn down as dividends.
This dividend income is then subject to additional personal tax – payable via self-assessment. Most company owners also receive a salary, which may or may not be subject to further income tax.
Of course, these ‘tax dodging’ stories would lose their impact if they contained all the facts, wouldn’t they?
Unfortunately, given the lack of public sympathy towards the tax burden suffered by self-employed professionals (the huge April 2016 dividend tax hike is a great example), these stories are unlikely to go away any time soon!