Dividend changes: Budget 2015

csgohan4

Together with the looming ban on claiming for travel and sustinence, is this the final nail to make PSC/ umbrella less attractive?

http://www.contractoruk.com/news/0012118osborne_four_fold_attack_contractors.html

If your a basic rate payer and own your company, your dividend tax liability has gone from 19% to 26.5% including corporation tax of 19% for 2016-17

The only shining light is the time present for further consultation before becoming final.

What's everyone's thoughts on this? Do you agree with Mr Osbourne's reasoning that the old dividend system was archaic and based on corporation tax of 50% in the past and needed reforming.

pleasedelete

The ban on travel and sustenance wont affect genuine limited company contractors though. If you fall foul of the new travel and sustenance rules and operate through a limited company I would be more concerned about IR35 than the new dividend changes.

TomJ

csgohan4 wrote: »

Together with the looming ban on claiming for travel and sustinence, is this the final nail to make PSC/ umbrella less attractive?

http://www.contractoruk.com/news/0012118osborne_four_fold_attack_contractors.html

If your a basic rate payer and own your company, your dividend tax liability has gone from 19% to 26.5% including corporation tax of 19% for 2016-17

The only shining light is the time present for further consultation before becoming final.

What's everyone's thoughts on this? Do you agree with Mr Osbourne's reasoning that the old dividend system was archaic and based on corporation tax of 50% in the past and needed reforming.

Hardly the final nail given it's still better than CT + e'ee's NICs + e'er's NICs = 19% + 12% + 13.8%. May be a problem for higher rate tax payers; I really can't be bothered to do the maths right now as I'm not sure if the 32.5% applies only on amounts over the £43,000 level.

EDIT: My brain's clearly not working; salary and NI are deducted from profit thus reducing the residual corporation tax bill, but subject to income tax.

Crudely you're looking at CT + dividend tax = 19% + 7.5% = 26.5% vs IT + NICs = 20% + 12% + 13.8% = 45.8%, but the fact that more IT/NIC reduces the residual CT bill anf the different allowances and thresholds make the exact comparison complicated. It is still clearly worth taking salary of at least the NIC Primary Threshold and dividends of at least £5k, but beyond that it'd need a spreadsheet I can't be bothered to put together right now to see the right balance. Of course, as the stated aim is to discourage incorporation for tax reasons this is a feature, not a bug. Which shows how messed up the whole tax system is and why simplifying the whole thing into a single, simple rate of tax on all income would be a Good Thing.

quietriot

TomJ wrote: »

Which shows how messed up the whole tax system is and why simplifying the whole thing into a single, simple rate of tax on all income would be a Good Thing.

No it wouldn't. Why do people keep peddling this idiocy?

TomJ

quietriot wrote: »

No it wouldn't. Why do people keep peddling this idiocy?

Because they think that a simplified tax system would avoid confusion, error and unnecessary expense for individuals, companies and the Gov't? That it would also avoid complaints about unfair avoidance because the less convoluted a system, the fewer loopholes are possible? Because they think the rate of income tax should reflect the rate at which income is taxed, given national insurance clearly isn't an insurance in any usual sense of the word.

Pennywise

csgohan4 wrote: »

What's everyone's thoughts on this? Do you agree with Mr Osbourne's reasoning that the old dividend system was archaic and based on corporation tax of 50% in the past and needed reforming.

The old dividend regime was fine in it's day, BEFORE Gordon Brown tinkered with it. The company paid 25% advance corporation tax whenever it paid a dividend, to be offset against corporation tax on its profits - fine. The individual received the dividend and the 25% went against their tax bill - fine - if it wasn't enough, a balance was payable, if it was too much, a refund was made. One set against the other and followed through to the end recipient. It also reduced the scope for Treasury loss and evasion as it had to be paid alongside the dividend, even if the company didn't have a tax liability (i.e. due to losses or investments) and it had to be paid quicker meaning less risk of the business going belly up before its taxes are paid!

Then the idiot Brown changed it to a nominal "pretend" 10% tax credit that meant nothing and did nothing. It was neither paid nor refunded by neither the company nor the individual. It was just a pointless piece of complexity dreamed up by a lunatic.

Rest in peace - as quickly as possible!

The changes are levelling out the differences between someone operating as a sole trader compared to someone operating as a limited company. What's wrong with that? There was never any logic as to why Joe Smith, the window cleaner, paid less tax/nic if he operated a limited company compared to him operating as a self employed sole trader!

It's the end of tax-motivated incorporations. Nothing wrong with that. People can still trade via a limited company for all the other benefits (limited liability, tax planning due to timing of withdrawals, etc., improved image, more likelihood of winning work from large organisations, etc), but in the future, they'll be paying similar amounts of tax/nic compared with being a sole trader.

le_loup

Well you got that wrong!
It was that nice Mr Lamont who first changed this regime and intended, had the torys been re-elected in 1997 to do exactly what GB finished.
But hey - who wants to spoil a good story?

TomJ

Pennywise wrote: »

It's the end of tax-motivated incorporations. Nothing wrong with that. People can still trade via a limited company for all the other benefits (limited liability, tax planning due to timing of withdrawals, etc., improved image, more likelihood of winning work from large organisations, etc), but in the future, they'll be paying similar amounts of tax/nic compared with being a sole trader.

Well, not entirely the end; looking at incomes up to the higher rate of tax people taking up to the personal allowance as salary and the rest as dividend still pay up to 8% less tax than taking it all as salary. I can't be bothered to do the conditional logic in the spreadsheet to go into higher or additional rate tax payers.

chrismac1

Whilst I myself will be paying £3k or so more tax under this change, and around 50 of my limited company clients will too, I agree with Pennywise that there has been too much of a benefit in "going limited" in the last 5 to 10 years.

My main problem with this change concerns some of my elderly clients who have £10k or so of dividend income, which amounts to a stockmarket portfolio of say £300k. This Budget is bad news for them.

Some will no doubt say "Well they are pretty wealthy." Maybe, but £1m or so in assets does not go that far these days if you can expect to have 25 years of retirement before the Grim Reaper shows up. And these people are exactly those who have done the most to pay for the mess the West got into in 2008. Quantitative easing has artificially held down interest rates massively for about 7 years now.

So before the crash these folks could probably look to get around 5% or so on fixed rate deposit bonds with no risk of capital loss. Now even 1.5% can involve dealing with institutions you'd perhaps be a bit wary of. Hence many funds have moved them towards high yield stocks, after all the last 10 years has highlighted that there is more chance of RBS or Lloyds defaulting than, say, Voadfone PLC.

So now along comes Boy George and says "Thanks a lot for propping up the world's financial system for the past 7 years and I am now going to clobber you for tax to make a comfortable retirement more of a challenge for you."