Autumn Statement 2022: Jeremy Hunt continues raid on limited company contractors by making dividends more taxing
A cut in the dividend allowance to a paltry £500 appears to be the nasty "surprise” of Autumn Statement 2022 that an off-payroll tax expert warned against, but IR35 itself didn’t feature.
Due to apply from April 2024, before which the currently £2,000 allowance gets cut to £1,000 on April 6th 2023, the £500 allowance “will not be welcomed by contractors,” warns SJD Accountancy’s Jo Thorne.
But dividend changes were always “expected” says SG Contractor Accounting, and at just £87.50 for basic rate PSCs -- and then £43.75 extra from 06.04.24, the take-home pay dents are small.
“We can’t see many people making too many tax planning decisions on these annual dents, in the same way they may have done if dividend tax rates were hiked,” says SG’s Dan Mepham.
'This is a bad news Autumn Statement for contractors'
Chancellor Jeremy Hunt also announced that the annual exempt amount in capital gains tax will be reduced from £12,300 to £6,000 next year and then to £3,000 from April 2024.
Given that before yesterday’s statement, Mr Hunt reinstated a corporation tax rise of up to 26.5% from April 2023, tax adviser Helen Christopher thinks PSCs have their card marked.
“This is [a] bad news [Autumn Statement] for contractors,” Genie Accountancy’s chief operating officer began in a statement to ContractorUK.
“For a government wanting to encourage businesses to grow and flourish in the UK, contractors now face another attack on their take home-pay after having received little support through covid.
“The reduction in the dividend allowance…[and] the reduction in the CGT tax-free allowance reduce the attractiveness of running a limited company”.
A chartered accountant, Christopher said that attractiveness reduces further by another Hunt announcement -- the income tax additional rate threshold falling from £150k to £125,140.
But it is the “double-pronged attack” of the dividend tax allowance decreasing with the corporation tax rate increasing that will bother PSCs the most, according to Brookson's Matt Fryer.
“This is disappointing…[and it’s ] short-sighted,” the Brookson managing director told ContractorUK.
“Remember, it comes at a time when the economy needs flexible talent to be available to work as and when required to help support the productivity of the UK economy and limit the impact of recession [which Mr Hunt confirmed is now underway].
“Some contractors may even decide to seek permanent employment because of this Autumn Statement and other recent announcements [preceding it].”
'Tax-efficiency of limited companies being eroded'
Reluctantly agreeing is SJD’s Jo Thorne, who says with the dividend allowance cut alone, the government is eroding “the original value in this tax efficiency” which the government itself introduced.
“It’s possible this may be a precursor to the benefit [of having a tax-free allowance on dividends] being removed altogether”, cautions Ms Thorne, SJD’s manager for technical compliance.
Contractor accountant Graham Jenner thinks Thorne is probably onto something.
Given the dividend allowance started out at £5,000, only for it to have been continually whittled down -- to just £500 from April 2024, it looks like the tax-free benefit is now hanging by a thread.
'Dividend allowance cut is an easy tax take for clever chancellor Hunt'
“Cutting the dividend allowance from £2,000 to £1,000 is an easy tax take, annually raising an extra £87.50 from a basic rate tax payer, £337.50 from a higher rate payer and £393.50 from an additional rate payer,” the founder of Jenner & Co began in a statement to ContractorUK.
“But the really clever bit is in reducing the allowance rather than increasing the rate, on top of the 1.25% [rate increase] already sneaked through. That means that the chancellor takes a little from every single person with dividend income of £2,000 or more.
“And reducing it to £500 from April 2024 is just more of the same. So I can now see little point in keeping the allowance, at all, if it is going to be that low.”
Less pessimistic about the dividend allowance’s chances of survival -- or just plain aware HMRC doesn’t like hassle, is SG’s Mr Mepham.
“I don’t think the government will remove the dividend allowance altogether,” he reassured. “Similar to the interest allowance, they don’t want to force people to do tax returns with relatively modest levels of dividend or interest income.
“Someone with dividend income below £500 is probably not a business owner, but more likely a hobby investor or investor for supplementary income. Therefore it would seem silly to make those people do a tax return to report and pay tax due.”
'Government has no care or consideration towards people running a company'
Either way, chopping down the tax-free allowance for entrepreneurial types running their own companies, to a measly £500, seems “wholly at odds” with Hunt’s stated ambitions.
Former tax inspector Kate Cottrell explained her assessment: “The reduction in the dividend allowance to £1,000 from April 2023 and down to £500 from April 2024…[is the government] shouting that they have no care or consideration for those that take significant risks by running their own company.
“That doesn’t sit comfortably with the chancellor’s stated desire to see the UK as the ‘next Silicon Valley’ and to be a ‘Science Superpower.’ As a former entrepreneur, which he also said in his Autumn Statement speech, he should know both of those are dependent on our highly skilled, talented contractor workforce and those trying to start innovative businesses.”
'Those doing similar work must pay a similar amount of tax'
Usually focused on IR35, Cottrell is pleased that at least one of her off-payroll advisory’s six Autumn Statement wishes was today granted by Hunt (‘No IR35 Review, please’).
But she corrected any suggestion that the new Rishi-Sunak government has overlooked IR35.
Not only has the government reinstated IR35 reform after it was temporarily cancelled by previous chancellor Kwasi Kwarteng at Mini-Budget 2022, but Mr Kwarteng’s’ replacement today outlined the thinking behind it.
“At 2.8 of the Autumn Statement 2022’s Green Book, we have Mr Hunt reiterating the usual government mantra of individuals ‘doing similar work [need to] pay a similar amount of tax,’ the co-founder of Bauer & Cottrell quoted.
'Government is continuing to penalise contractors'
She added: “That’s supported by Table 5.2, showing the billions in pounds that HM Treasury will raise by keeping in place the reforms to the off-payroll working rules of 2017 and 2021, maxing out at more than £2billion in 2027-28. That’s the government subtly committing to them continuing to penalise contractors.”
Another adviser on IR35, Louise Rayner of NumberMill, said before Hunt’s statement that “stability and uncertainty” to end the “volatility” of late would be a good Autumn Statement for contractors.
Writing today about Autumn Statement, exclusively for ContractorUK, status specialist Rebecca Seeley Harris, author of CEST Explained and founder of ReLegal Consulting, positions economic turmoil as a context that contractors can't afford to miss.
“The Autumn Statement comes at a time of significant challenge for the UK economy,” Seeley Harris writes at the outset, way before exploring how small take-home pay dents may affect individuals within that economy.
A former adviser to the Treasury, she adds: “Along with the after-effects of Brexit and then the pandemic, the war on Ukraine, surges in energy prices, high inflation, an ever-increasing interest rate. And then the Truss Growth Plan did even more damage.”
As to where we are now, under chancellor Hunt, Christian Hickmott, managing director of Intregro Accounting summed up: “The reductions in the dividend allowances are small fry – [especially] in the grand scheme of things. Fortunately this Budget was less of a rollercoaster ride for contractors and everyone else; and more of a hand desperately trying to steady the wheel of the government vessel, thrashing its way through the stormy waters of the UK economy.”