[Closed] Small Company Directors / IT Contractors - Yesterday budget

income from dividends was always taxed, do you mean at income tax rates instead of corporation tax?

(smugly left that game years ago)

Profit is taxed, doesn't matter if it was taken as Divs or not. Ive not read the detail but a 'Limited' company will still pay CP on profit and then the Director personally taxed if they receive dividend payment ??

Dividends tax goes from 25% to 32.5% for higher rate tax payers (after £5000 allowance) from next April.

Dividends were always taxed, however they don't attract NI and this is one of the reasons why some contractors choose to set up Ltd Companies. The increase in dividend tax rate is supposed to be a way of combating this tax avoidance loophole.

Just another way to shaft people who have taken a risk and jumped into self employment. So the payback for taking the risk, having to do tax returns, engage lawyers, accountants etc, and the stress and worry of it all is now diminished, so why would anyone now go contracting?

Why does anyone self employed pay themselves in dividends other than to avoid paying tax?

Yeah, a big tax hike for those that pay themselves with dividends. A lot of contractors will be sticking their rates up in the near future.

A lot of contractors will be sticking their rates up in the near future.

Or taking a pay cut/paying the right amount of tax. Just because your tax situation changes doesn't mean you are worth more.

Businesses will always do their best to pass costs on. Do you think VAT hikes are just absorbed by businesses?

I'm still trying to work out if the Limited company needs to pay CT on 'profit' which allows it to make the dividend payment AND the Director pays income tax when they receeive the dividend ?

hy does anyone self employed pay themselves in dividends other than to avoid paying tax?

This.

It was a loop hole and most contractors I know will smugly gloat about it at the top of their voice in the office. I didn't do it when I contracted but there were other ways and means. Only fair that tax is paid on high earnings like everyone else, no?

(smugly left that game years ago)

So, you moved to Australia, found the tax breaks weren't there for contracting, and now are "smugly" looking down from your high horse? 🙂

[url= http://www.contractoruk.com/news/0012120summer_budget_2015_hits_psc_contractors_hard.html ]ContractorUK [/url]has a page on the effects.

For the benefit of those with a downer on contractors, who might be overlooking this, obviously all businesses will be negatively affected.

I'm still trying to work out if the Limited company needs to pay CT on 'profit' which allows it to make the dividend payment AND the Director pays income tax when they receeive the dividend ?

Basically, yes.

You used to get a reduced rate of tax on dividends that cancelled out the corporation tax, but now they've made it more generous for a low band and very aggressive beyond that. You'll now get taxed twice if you're a one-man-band or small company.

so why would anyone now go contracting?

Everyone who is riding their high 'pay more tax horse' can probably expect the day rate their typical tradesman, plumber, electrician, etc., charges to increase a fair bit.

Everyone who is riding their high 'pay more tax horse' can probably expect the day rate their typical tradesman, plumber, electrician, etc., charges to increase a fair bit.

Businesses will always do their best to pass costs on. Do you think VAT hikes are just absorbed by businesses?

(smugly left that game years ago)

So, you moved to Australia, found the tax breaks weren't there for contracting, and now are "smugly" looking down from your high horse?

Strangely enough down here in Oz I can claim just about anything I want even as an employee.

IT contractors working on the same project as me are on over £500 a day. I wouldn't mind having to cope with the tax burden of that income...

Clearance requirements mostly

Before everyone starts frothing at the mouth, dividends were always taxed at 10% anyway, but it was by way of the dividend tax credit so you didn't really 'see' it as tax.

I did the fag packet maths yesterday and working up to the new HRT of 43k and from the new allowance of 11k, you're actually better off under the new scheme by about £250.

Above the HRT I'm not sure, I'm sure my accountant will tell me.

Above the HRT I'm not sure, I'm sure my accountant will tell me.

[i]I'm still trying to work out if the Limited company needs to pay CT on 'profit' [/i] Yep, as before.

[i]which allows it to make the dividend payment AND the Director pays income tax when they receive the dividend ?[/i] Yep, as before, but the rates have changed.

Oh, and corporation tax is going down.

[i]32.5% vs 10% [/i]

It'd be 32.5% vs 25% if anything (which I think is what it is)

32.5% vs 10%

32.5 vrs 25%, for dividends above the £5000 allowance. assuming a yield of 5% (which seems generous) this would require share values of £100,000 held in addition to ISAs and Pensions, so it's a fairly small number of people that will actually be affected.

Everyone who is riding their high 'pay more tax horse' can probably expect the day rate their typical tradesman, plumber, electrician, etc., charges to increase a fair bit.

I don't expect to have to subsidise the self employed and business owners through taxation. Earnings should be taxed the same no matter what their source.

Why does anyone self employed pay themselves in dividends other than to avoid paying tax?

This. It's just closing a tax loop hole which has gone on for far too long. Pretty fair really.

[i]This. It's just closing a tax loop hole which has gone on for far too long. Pretty fair really. [/i]

As a one man band IT contractor with a Ltd Co set up, I can't really disagree. I pay myself in dividends because it is more tax efficient, if the system was changed such that my daily rate was taxed in the same way as if it were PAYE, I couldn't really complain.

However, for other directors of companies who employ others, there is an argument (and a reasonable one in my view) that the tax advantages of dividends are a kind of 'reward' for the job creation.

It's risk vs reward and variability of income. Nobody will take the risk of being self employed for the same income as a safe job. If the tax rates are the same then prices will go up (or small businesses will disappear).

Nobody will take the risk of being self employed for the same income as a safe job. If the tax rates are the same then prices will go up (or small businesses will disappear).

So it's panic over. Great, I'll book another foreign holiday and order my new car.

...there may be quite a few that are significantly worse off.

The inevitable conclusion of any budget.

If you're a contractor who is also a single parent and relied on tax credits to buy food, you'll be significantly worse off. Otherwise, you'll probably just have to hang onto the Audi for an extra year.

[i]If you're a contractor who is also a single parent and relied on tax credits to buy food, you'll be significantly worse off. Otherwise, you'll probably just have to hang onto the Audi for an extra year. [/i]

Don't forget that they'll also have to rely on their woodburner to heat their house, rather than their smugness 🙂

MSP - Member
Everyone who is riding their high 'pay more tax horse' can probably expect the day rate their typical tradesman, plumber, electrician, etc., charges to increase a fair bit.
I don't expect to have to subsidise the self employed and business owners through taxation. Earnings should be taxed the same no matter what their source.

[Rant= coming...]

We here in the private sector risk everything & often lose everything, collect tax, NI VAT, often pay Health Insurance and exist outside of the NHS, we generate the very wealth that pays for these idiots in Governments with their final salary pensions index linked, we on the other hand have had our pension system devastated and would be lucky to get annuities at 5% after their total wrecking of the economy and printing of billions to keep you lot in jobs, so please don't consider you are in any way subsidising us.

[/Rant]

Good rant, suitably idiotic and completely wrong, as we have come to expect from you.

The only people better off from the dividend changes are higher rate tax payers that earn up to £5k in dividend income. Whereas they would previously have had a tax bill to pay of £1250, they now get to keep the lot.

The rule change both closes the loophole utilised as a tax avoidance measure by the self employed &, in tandem with the £1000/£500 interest rule due in April and the increased personal allowance, probably removes an awful lot of people from the tax system, reducing resource requirements at HMRC.

I contract because I don't want to work for anyone 😉 It's renummerated better sure but after no holiday/no sickness/potential for no work when one contract ends, then that seems reasonable.

In terms of paying tax, my view is follow the rules and don't be a d*ck about it. Stick cash in the bank in the good times, deal with the fact that you don't have any say if it changes negatively.

Only if I was going to make less than I do contracting than going back perm, would I ever consider it.

The only people better off from the dividend changes are higher rate tax payers that earn up to £5k in dividend income. Whereas they would previously have had a tax bill to pay of £1250, they now get to keep the lot.

Well they're not the only ones but they are the ones who will benefit most. Basic rate tax payers would have paid 10% tax so they will benefit too, although I appreciate that this will be a relatively small number.

What is interesting is how this will be applied (or not applied) to the dividends that are paid into funds (e.g. those held by pension funds and ISAs). It could make quite a difference to those funds and benefit a lot more people in the long run.

e.g. those held by pension funds and ISAs

AIUI Tax sheltered savings are exempt.

that's a good point as we pay a chunk (depending how well things went in the year) into pensions/other long term stuff at year end. I feel I'm essentially absolving the state of looking after me when I retire (in terms of pensions not NHS etc) so therefore investing that tax free doesn't seem like a dodge.

Without being pious, I feel for the poor bggers losing the tax credits who really need them. I'm not sure I'm buying 'woe is me, it's not worth being a contractor anymore' - quick calcs suggest it's still a good way to earn an independant living.

AIUI Tax sheltered savings are exempt.

Not from the 10% dividend tax rate they're not.

Edit: or did you mean exempt from the £5000 limit?

Basic rate tax payers would have paid 10% tax so they will benefit too

No. Dividends paid by companies that pay UK corporation tax have a 10% tax credit attached. This is not deducted at source & investors don't have to physically pay it. Dividends are not going to increase by 1/9th overnight on 6 April.
The only circumstances where a lower rate tax payer would have to physically part with 10% of a dividend would be on overseas dividend income where no dual-taxation agreement between the home country & the UK exists.

It will also make no difference to the dividends received by ISAs & Pensions. The notional 10% tax credit will be removed, but the net receipt will not increase.

From ToryGraph

People with dividend income from investments, such as shares or some equity funds, [b]outside of Isas[/b] - or contract workers who set themselves up as companies, known as Personal Service Companies, to pay themselves dividends could face higher bills.

Caroline Le Jeune, tax partner at Blick Rothenberg, said: "Those with low dividend income, will probably pay around the same and some may pay less, as a new dividend tax allowance of £5,000 a year replaces the dividend tax credit. But higher rate or additional rate taxpayers will lose out."

Couple of observations. Both tax rates are lower than office tax so as a self employed person paying yourself in dividends it is still advantageous.

NI still does not need to be paid either if your 'salary' is at the c.£7600.

Now, to balance the mouth frothing, pitchfork wielding folk bandying around accusations of tax avoidance don't forget that the self employed get no holiday pay, sick pay our any other employee benefits so it's not all roses working for yourself.

You know I like to think that I'm reasonably intelligent but I think I'll give up trying to understand how the tax on dividends actually works. Given that I receive about £50 a year I don't think anyone will be chasing too hard if I don't get the tax return right.

Now, to balance the mouth frothing, pitchfork wielding folk bandying around accusations of tax avoidance don't forget that the self employed get no holiday pay, sick pay our any other employee benefits so it's not all roses working for yourself.

Yes they do, it's just built into the rate that they are paid. Another way of looking at it is that regular employees have money deducted from their pay to account for those things.