Jeremy Hunt to halve dividend allowance at Autumn Statement 2022 -- reports

Chancellor Jeremy Hunt is rumoured to be considering cutting the £2,000 dividend allowance in half at Autumn Statement 2022.

The cut would likely cost about £87.50 extra in tax for a limited company boss taking £40,000 in dividends a year, SG Contractor Accounting totted up for ContractorUK.

But when combined with the reinstated 1.25% points hike in the three dividend tax bands, and the corporation tax rise from April 2023, limited companies face a hefty total effective tax rate of 50.31%, according to calculations for ContractorUK by Moore Kingston Smith.

'Pretty worrying'

A tax-free dividend allowance of just £1,000 amid a cost of living crisis, high inflation and mortgage affordability issues, plus an incoming marginal corporation tax rate of 26.5%, will make PSCs wince.

Meredith McCammond, technical officer at The Low Incomes Tax Reform Group explained last night to ContractorUK.

“Taken together with the corporation tax increase for those with profits of over £50,000, and everything else at the moment, if I were a PSC contractor -- and especially if I had a big mortgage, I would be pretty worried.”

'Lot of tax to-ing and fro-ing'

But the dividend tax-free allowance being cut on November 17th is currently only a rumour.

First reported by the Financial Times, the newspaper presented no quote to back up its claims; cited them stemming from “people briefed on Treasury discussions,” and stated that Mr Hunt has not made a decision.

Contractor accountant Daniel Mepham feels like he’s been here before.

And after a string of U-turns, delays and broken promises, he’s not crunching too many numbers for his PSC clients just yet.

 “Let’s wait and see what happens,” the managing director of SG Contractor Accounting cautions. “We’ve had a lot of to-ing and fro-ing over the last few months on tax.

“But if the rumour is true, then it’s more chipping away at the contracting and small business communities. They got little support during covid, but government now expects them to pick up the bill.”

'Risk of dividend rates increasing further'

Even without Hunt’s rumoured cut to the dividend allowance, which is estimated to raise £455million in the next tax year, the chancellor is already penalising individuals receiving their income as dividends but not those receiving income as earnings.

In fact, the National Insurance Contributions increase of 1.25% points has been reversed, whereas the same percentage points increase has not been reversed on dividends.

Tasked with bridging a £50billion gap in the UK’s finances, the chancellor could go even further next Thursday on dividends by adding an additional 1.25% points onto dividend rates currently -- 8.75% (basic); 33.75% (higher); 39.35% (additional).

“The risk of dividend tax rates increasing further on November 17th remains,” Tim Stovold, partner at Moore Kingston Smith told ContractorUK.

“But any increase should only apply from that date, so, if individuals are due to take dividends in 2022/23 anyway, paying dividends and putting the appropriate paperwork in place to evidence them being paid could shelter individuals in the short term from further tax increases.”

'Limited companies face total effective tax rate of 50.31 per cent'

And the taxation increases already on the statute books for incorporated businesses are swingeing. A chartered accountant, Mr Stovold explained:

“Before the dividend rates of tax increased in April 2022, the total effective rate of tax was 45.33%, due to corporation tax at 19% …[and higher rate dividend tax of] 32.5%.

“When we look forward to April 2023, the corporation tax rate increases to 25% and the dividend tax rate increases to 33.75%, giving a total effective rate of 50.31%.”

'Operating via PSC being made even more difficult'

The chartered accountant said this represents a “significant tax increase” on contractors, “possibly with further to come”, so “operating via a PSC is being made even more difficult.”

But as halving the dividend allowance will likely mean only “around” £87.50 extra to HMRC every year on dividends of £40,000, SG believes contractors will choose their battles.

“It may be worth accelerating dividends prior to any dividend tax hike, meaning take more now and less later if there’s a hike, but we expect PSCs have other things to revolt about.”

Elaborating, the tax firm’s Mr Mepham - who estimates an outlay to HMRC of £500 a year on £40,000 dividends once both the allowance cut and the 1.25% points hike is factored in, continued: “The fiasco of the off-payroll repeal reversal -- for a start.”

'Small beer'

A tax partner at RSM Tenon, Chris Etherington is also trying to keep an eye on the bigger picture.

“In the grand scheme of things, this [envisioned money to be raised from slashing the dividend allowance to £1,000] is relatively small beer,” he posted.

“Perhaps [that is] the most worrying part of this, as if they’re scrabbling around for extra tax revenues from the likes of this, then what else can we expect [on November 17th]?”

Etherington also warned on LinkedIn that four million taxpayers could be hit by Hunt halving the dividend allowance, with the “vast majority” of those each on a total income of under £50,000.

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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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