'Galling' dividend tax increase shows government is 'blinkered' to micro-companies
The architect of a scheme to support limited companies during the pandemic who has advised the Treasury on IR35 has called Boris Johnson’s dividend taxation increase on contractors “galling.”
Rebecca Seeley Harris, a former OTS adviser who drew up DISS to help limited companies financially cope with covid, also told ContractorUK yesterday that the prime minister does not appear to understand small companies.
Founder of ReLegal Consulting, Seeley Harris was speaking after the PM unveiled a £600million tax raid on dividends, by hiking the rates in 2022-23 for basic, higher and additional rate taxpayers to 8.75%, 33.75%, and 39.35% respectively.
“It is particularly galling that those who had so little help [from the government to get through the coronavirus pandemic] are now having to pay for the UK’s economic recovery,” she says.
“Umbrella company workers are also going to be hit hard because they will no doubt have to pay both employers and employees NICs. All in all, the government really don’t seem to have any empathy for the micro-business sector whatsoever.”
For being unleashed before Autumn Budget 2021, which is to be held on October 23rd, the dividend tax is a “surprise and not a welcome one,” according to Orange Genine operations director Helen Christopher.
A chartered accountant, Ms Christopher said last night: “Limited company workers have had it tough with limited help from the government during the still ongoing pandemic.
“It seems the directors of companies are now being asked to help pay for government support that they themselves did not benefit from.
“So it appears that -- yet again -- the tax gap between PSC and employment is being squeezed, with no recognition for the additional risks that PSC contractors take.”
Another expert on IR35 contractor status, Seb Maley, also has a sense of being here before, again for all the wrong reasons, but this time with dire consequences for the economy.
“This is another short-sighted attack from the government on the self-employed,” he said.
“Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves -- people who have…the flexibility, dynamism and skills…that the government needs most to speed up the economic recovery.”
According to the government’s calculations, the dividend tax increase will cost basic rate taxpayers an average £150 extra in 2022-23, rising to £403 for higher rate taxpayers.
'Sixty per cent unaffected'
In a HM Treasury document outlining the impact, chancellor Rishi Sunak’s department adds: “Additional and higher rate taxpayers are expected to contribute over 70 per cent of the revenue from this increase in 2022-23.
“[However] due to a combination of the £2,000 tax-free dividend allowance and the personal allowance, around 60 per cent of individuals with dividend income outside of ISAs are not expected to pay dividend tax and are not expected to be affected in 2022-23.”
Further outlining the impact, but referring to the NI hike for employers and employees, HMT said the £4,000 Employment Allowance can be applied to the levy, thereby removing 640,000 businesses from its scope.
“The national insurance tax hike will hit employers”, said Mr Maley, heading off any suggestion it won’t.
“[It will] push up the costs of hiring workers on the payroll. It goes without saying that this could stifle employment growth. With this in mind, businesses that have needlessly forced their contractor workforce inside IR35, or insisted they work PAYE in response to IR35 reform, should rethink this decision immediately.”
As to the latter cohort (who typically work through umbrella companies), “most will end up paying both the employer's and employee's NICs rises,” meaning “they will be taxed twice,” observed Ms Seeley Harris.
A tax lawyer, who also chairs the Employment Status Forum, she added: “This is obviously another blow to workers who are already in a precarious position.[Ironically] this will include care workers and NHS staff -- working in the sector that the levy is supposed to fund -- going through umbrellas.”
As to solutions, chartered accountant James Poyser says that he will “continue to work” with the business department to “ensure policy reflects the changing nature of work and that workers’ rights are upheld.”
And such education is vital, the inniAccounts boss implied, because he too believes government officials are demonstrating a worrying lack of understanding.
“The government are blinkered to the benefits that these companies, self-starters and entrepreneurs bring to the economy, and the value they offer companies across the UK,” he says.
“We had hoped that this cohort of workers would be left alone but this will be seen by self-employed professionals as yet another cynical indictment by the Conservative government.”
'Total lack of understanding by the government'
Kitty Ussher, chief economist at the Institute of Directors echoed: “This is an extraordinary time to be adding additional burden to business and the cost of employing staff, just as it looks to recover from the pandemic. It smacks of political opportunism, exploiting public sentiment at the expense of some of the most productive and entrepreneurial segments of the economy.
“The surprise new tax on dividends will yet again target small company directors. Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by government during the pandemic.
“Employees and the self-employed were provided with financial support to tide them over, but this group was not. While it may make sense in the long-term to align tax rates for all types of income, this government has shown through its actions a total lack of understanding to the very real difficulties faced by owners of the smallest businesses in Britain.”
Ominously, it is a lack of understanding which a former tax inspector fears may change the contractor landscape irrevocably.
Carolyn Walsh of CWC Solutions, which offers both umbrella and accountancy services to limited companies said: “For existing contractors, I suspect that the increase in dividend tax amid the existing struggle to find contracts which fall outside IR35 may be the final nail in the coffin – at least for some.”