Boris Johnson unveils shock dividend tax increase, 'hitting contractor sector hard'
Boris Johnson has stunned the contractor sector by announcing a shock increase in the dividend tax of a not insignificant 1.25 per cent.
Catching even experts off-guard for being unveiled outside a Budget -- also announced yesterday for October 27th, the increase by the prime minister was only meant to affect NICs.
Indeed, Mr Johnson did say that National Insurance for employers and employees will rise by 1.25% each, but he also said that “dividend rates” will be “increasing by the same amount.”
Unapologetic, the PM said all three HMRC payments attract a new, UK-wide ‘Health and Social Care Levy,’ with the effect of higher tax bills for both umbrella and PSC contractors.
'Contractors taking dividends and salary will contribute to the levy'
Tim Stovold, head of tax at Moore Kingston Smith says the Budget-style measures put the onus on PSC contractors to act, as the additional tax cannot be ducked or mitigated.
“The 1.25% increase to the employee’s and employer’s NI rates and….[to the] dividend tax rates means that, whether an owner of a contractor company takes dividends or salary, they are going to be making some contribution to the Care Levy.
“We have not been given a date yet for the new rates to apply but it is likely to be from April 2022. So taking a dividend before that date would avoid the tax increase,” Mr Stovold told ContractorUK.
'Sting in the tail'
“After that date,” Mr Stovold further advised, “individuals may prefer to leave cash within their companies to make investments through their companies and delay taking dividends.
“However, this approach may have a sting in the tail as, if the company generates income that is not subject to the care levy such as buy-to-let profits, if that income is later extracted by way of dividend, the 1.25% care levy will apply at that point on income which would have escaped the levy if it had been earned personally.”
Using the same phrase to describe the worst part of the new 1.25% levy, but insisting it affects umbrella company users more is Matt Fryer, head of legal at Brookson Legal.
'Umbrella employees will be hit twice as hard'
“The sting in the tail, is the impact on umbrella employees,” preferred Mr Fryer, notably “where the contract rate includes the employer costs which is predominantly employer’s NIC.
“This means that umbrella company employees will be hit twice as hard in terms of take-home pay impact than limited company contractors.”
The legal expert explained: “It should be noted that the 1.25% applies to both employee NIC and employer NIC – so a 2.5% contribution [in total], but only 1.25% on dividends. Therefore employees and their employers will be contributing more than limited company contractors.”
'Lower paid umbrella contractors £14 worse off -- a week'
Chris Mattingly, CEO of IR35 Navigator echoed Mr Fryer’s impact assessment (the official assessment was sought from HMRC which directed ContractorUK to HM Treasury, which has been invited to comment, including on the government’s claim that 40% of small businesses will be unaffected by the new levy).
“While no one can deny the importance of social care funding, the 1.25% tax hike faced by both employee and employers is going to hit contractors particularly hard,” began Mr Mattingly.
“Whether operating inside or outside IR35, the average contractor will now face significantly higher costs as a result.
“[But it is] lower paid umbrella contractors [who] are likely to be hit the hardest. [If the levy was] applied today, and without any supporting increase in day rates, a typical umbrella worker on a £200 a day, will be £13.70 worse off -- each week.”
'Affected limited companies were unsupported during covid'
Approached yesterday by ContractorUK, bosses at three contractor accountancy firms agreed that limited company workers will be reeling from the levy marginally less, but each said that the context would sting PSCs too.
Christian Hickmott, CEO of Integro Accounting says: “So those who didn’t get hardly any support during the pandemic now get to pay for it as well? How very kind and generous of the government.”
Chris James, a director at JSA Accounting says: “For contractors, many of whom will still be suffering from the inequalities of furlough, the impending corporation tax rises, and the implementation of the new off-payroll working rules earlier this year, [with this new levy] they will now be forgiven for feeling targeted again.”
And Graham Jenner, founder of Jenner & Co says: “Those contractors with their own limited company, lucky enough to obtain a contract outside IR35, will be disappointed that, having received little support under the furlough scheme, perhaps because they benefited from no NI on dividends, they are now being asked to contribute the equivalent of the hike in NI, by way of the dividend tax hike.”
'Cleverly-set dividend tax'
Of the three tax experts, Mr Jenner (who made clear he supports the aim of proper funding for social care), was the least forgiving of Mr Johnson, perhaps given that the Tory party’s 2019 manifesto pledged not to increase tax rates. The PM called it, at the time, his “guarantee.”
But the veteran accountant believes some trickery, or at least psychology is in play. “When the dividend tax was introduced it was cleverly set at a rate of 7.5% -- not too high to stop people from taking dividends, but high enough to generate reasonable levels of tax.”
Mr Jenner continued: “This new 1.25% hike, coupled with the hike in NI means it won’t discourage those with their own limited company from paying dividends -- they will just have to pay more tax.”
'Biggest catch-up programme in NHS history'
In his announcement yesterday, Mr Johnson said the hike in dividend tax was the government “asking better-off business owners” to “make a fair contribution”.
He also described the social care levy as going to contribute to the “biggest catch-up programme” in NHS history, forecasting it to raise £12billion which, initially, will go towards coronavirus-caused backlogs.
“The highest earning 14 per cent will pay around half the revenues,” the PM added of businesses paying more in NICs.
“[But] no-one earning less than £9,568 will pay a penny, and the majority of small businesses will be protected, with 40 per cent of all businesses paying nothing at all.”
'Inside and outside IR35 contractors; all will be hit'
At JSA, Mr James isn’t falling for any attempt to characterise the new social care levy as anything less than a new tax on earned income, even if its objectives are noble.
He told ContractorUK: “The fact that the new levy is being applied -- to national insurance first, then on top of the dividend tax, means that whether they are able to secure an inside or outside IR35 assignment, [contractors’] income will still be subject to the new charge [either way].
“It’s pretty staggering to see [all this from] what is, in essence, a mini-Budget, which feels like it’s arrived without a great deal of fanfare”.
'A new tax on those who work'
Regarding the levy similarly -- as a new revenue-raiser for the exchequer is Jolyon Maugham QC, founder of the Good Law Project.
He tweeted: “Tax on earnings will go up 2.5% -- whether the cash is handed over by employers or employees, it is still a tax on earnings.
"Tax on dividends [will increase] by 1.25% and tax on rents or interest income by 0%. [So] the measures favour those who don't have to work for a living.”