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Summer Budget 2015 (4): Attack on contractors' dividends

by Susie Hughes at 10:15 09/07/15 (Political News)

Some contractors who remunerate themselves via the dividend route are likely to be affected by the Chancellor's announcement of 'a major and long overdue reform to simplify the taxation of dividends'.

Advertisement The Budget signaled that the Dividend Tax Credit would be replaced with a Dividend Tax Allowance of £5,000 and setting new dividends tax rates. Speaking from the Dispatch Box, Chancellor George Osborne, said: "The dividend tax system was designed partly to offset double taxation on profits. But the system has not changed despite sharp reductions in corporation tax. Lower rates are creating rapidly growing opportunities for tax planning. "We have inherited a very complex and archaic system. So I am undertaking a major and long overdue reform to simplify the taxation of dividends. "The dividend tax credit will be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers. The rates of dividend tax will be set at 7.5 per cent, 32.5 per cent and 38.1 per cent. An increase of 7.5 per cent where dividend income exceeds £5,000." It is intended that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability – and some will pay less tax. CIOT - Close attention The Chartered Institute of Taxation (CIOT) warned that owners of small businesses which operate through a limited company will have to pay close attention to the Budget as it has announced a variety of tax changes that will combine to have a significant effect on the way that both they and their companies are taxed, particularly the way that dividend income is taxed. Advertisement CIOT President Chris Jones said: ”Typically, the owner of a small limited company will be paid through a combination of low salary and dividends. Shareholders/directors will need to carefully consider whether the changes announced will mean that this strategy may no longer be the most efficient way of extracting money from their company. “The Government is trying to clamp down on what it sees as ‘tax motivated’ incorporations but it is our view that Incorporation should always be a commercial decision first and foremost, albeit it can bring with it tax benefits. “We would urge anyone who is thinking about incorporating their business, or who is already operating through a limited company and is unsure whether it is now the most appropriate business structure for them, to seek the advice of their tax adviser”. Brookson - Preferred way Despite this change, specialist accountant Brookson beleives that contractors will still find working their their own limited company a preferred option. Advertisement Brookson said: "In a bid to simplify the tax system for dividend income, as well as “reduce the incentive to incorporate”, the Government has announced that they will reform the way that dividends are taxed from 6 April 2016. From this date a new dividend allowance of £5,000 will be introduced i.e. the first £5,000 of dividends received during a tax year will not be subject to income tax. Dividends paid in excess of this amount will then attract a new 7.5 per cent personal tax charge up to the higher rate tax threshold and then a tax rate of 32.5 per cent will apply. For additional rate taxpayers (over £150,000 of income) the dividend tax rate will be 38.1 per cent. This increase in personal tax rates on dividends will be tempered by a corporation tax rate cut to 19 per cent in 2017 and 18 per cent in 2020. "Despite these changes, operating as a limited company will still be the preferred way of working for most professional contractors and will remain more financially rewarding than working as an employee of an umbrella company or directly via agency payroll." ASPCo - Impact Samantha Hurley, from agency group APSCo said: “The simplification of the tax credit system for dividends which is due to be implemented from April 2016 could well have a significant impact on those people working through a personal services company.“ For further information Summer Budget links on Shout99 (3):Attack on contractors' 'disguised employment' - IR35 (2) Key announcements (1)HMRC Overview Full coverage of issues affecting small businesses and freelancers - and experts reactions to them - will be available in the Political News section of Shout99. Alerts also available through our Twitter feed. Tweet -- If you wish to comment on this article, please log in and use the Reply button below. Registering is free and easy - see 'Join Shout99'. - Susie Hughes © Shout99 2015

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Summer Budget 2015 (4): Attack...	Susie Hughes - 9/07
Re: Summer Budget 2015 (4): At...	Redvers - 9/07
Re: Summer Budget 2015 (4): At...	ThePower - 9/07
New "IR35-like" intermediaries...	mikew - 15/07

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