Hammond's dividend allowance cut 'devastating'

A £3,000 cut in the tax-free dividend allowance is the most direct shot across the bows of limited company contractors that the chancellor fired at Budget 2017.

It means contractors will be £225 worse-off a year if their dividends are covered by the basic rate; £975 worse-off under the higher rate and £1,143 worse-off under the additional rate.

The figures reflect the fact that the allowance utilises a portion of an existing tax band which is set by the taxpayer’s income before factoring in dividends, points out Gorilla Accounting.

But the seemingly “big” cut to the dividend allowance will not achieve Philip Hammond’s stated goal, warns the CIOT, which is to tackle the incidence of tax-motivated incorporation.

‘Won’t solve the problem’

“The change to the dividend allowance…will not remove the problem… [because]for a basic rate taxpayer, the impact of that change cannot exceed £225 per year.

[This represents just], a fraction of the typical tax benefits of incorporation at such levels of income,” explained Chartered Institute of Taxation policy director John Cullinane.

He said the allowance was only unveiled about two years ago with no consultation and now its successor, also not consulted on, is a 60% cutback that, similarly, won’t solve the problem.

But the £3,000 cut will help “partially reduce the tax difference between the self-employed and those working through a company,” the government claimed, implying the difference to be unfair.  

‘Reduced benefits’

According to status and compliance advisory Qdos Contractor, the cut will certainly “reduce the benefits of working independently.”

And in the eyes of the Freelancer and Contractor Services Association, it is “yet another measure that penalises the very entrepreneurs and flexible workers upon whom the UK economy depends.”

The Institute of Directors, whose members include limited companies, is not so sure. In fact, its tax expert (who gave evidence to the PSC Committee) backs the government’s thinking.

“The chancellor will take a lot of political pain, but he’s right to start down the road of creating a level playing-field for the differing taxation treatments”, said the IoD’s Stephen Herring.

‘Inevitable journey’

He added: “There will be many contractors, people in traditionally self-employed occupations, and entrepreneurs who will pay more…because of these changes but in a flexible modern economy this is a journey we were always going to have to embark on at some point.”

Emily Coltman, chief accountant at FreeAgent, disagrees. On top of a hike vowed yesterday in Class 4 NICs for sole traders, she says the tax-free dividend allowance cut will be “potentially devastating,” when it takes effect from April 2018.

‘Fine by me’

On Twitter after the Budget though, a PSC in the private sector echoed the thoughts of Brookson, by implying that no more than £1,143 in extra tax a year is preferable to being brought within the scope of April’s off-payroll rules, as was feared.

“Bruises indeed for a very flexible part of the workforce,” the contractor wrote, referring to ContractorUK’s Budget 2017 write-up. “But if it means no extension of [the public sector’s] IR35 [reforms] into [the] private sector, then that’s fine by me.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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