National Insurance Contributions on Investment Income

I must say, I couldn't image he would leave this loophole open for long. The cost to the Exchequer is enormous and the pressure on state benefits is already high. Where does the money come from if he dosen't do something about it?

Rob Graham

Do something about what? Many businesses are only staying alive because of this tax break. By changing the rules and removing the tax break (it's not a "loophole"), many of them will go under. Would he not be shooting himself in the foot by adding strain to the welfare system?

So why did he create the "loophole" (lower or zero CT for small businesses, reduction of divi tax "credit", increased NIC rates for PAYE employees, widening the scope of NICs on BIKs) in the first place?

Robin

This "loophole" has been around for as long as I can remember.

It would seem that Mr. Brown, having spent what I understood to be a massive surplus, is going to have no choice but to look for every conceivable way to raise revenue without raising taxes, his sole goal being to get his party reelected at the next election.

As a result, he is gradually going to make it more difficult for those operating at the margins, and he can only hope that he doesnt disaffect so many, that he loses the next election. He will be shooting himself in the foot, but the bullet is only around knee level at present.

Alternatively, he and Tony may be continuing to take the piss with our country and economy, as they may be fairly certain that the Boys in Blue dont have a hope in hell of ousting them.

God only knows what he has spent the money on, because I cannot see the slightest difference in health, education, crime and transport.

I voted for these guys in '97, having been a conservative all my life. I would vote them out tomorrow, if it were possible.

No doubt this does apply to many businesses, but there are many businesses - one or two man bands - that are becoming incorporated specifically to take advantage of this. They are being driven there by their accountants.

Rob

In message , Rob Graham writes

What do you man by that?

Presumably that sole traders and partnerships are being advised to incorporate for tax reasons.

Robin

Roughly how much is this tax break worth on, say, a £10,000 payment ?

Daytona

Depends. To a one-man company where the company has already paid the man £4615 as salary, on the next £10,000 there would be no CT, no IT, and no NI if taken as dividend. Taken as salary there would be no CT, but the £10k would count as nominal gross income of £8865.25 plus

12.8% employer's NI of £1134.75. From that, 11% employee's NI of £975.18 would be deducted, and IT at 10% of £1960 plus 22% of £6905, together £1715.10. So the tax break is worth £3825.03.

From the next £10k of money taken as salary (which would also count as gross £8865.25 plus employer's NI as above) the employee NI deduction would be the same, and the IT deduction a little higher (22% of £8865, or £1950.30), giving total deductions of £4060.23. Taken as dividends, CT of £2375 would be taken, so the tax break is worth £1685.23.

So am I correct in thinking that under the new rules employers NI of 12.8% and employees NI of 11% will be deducted from the dividend leaving £7,620.

and as well as CT, NI will be charged leaving £5,245 making payment by dividends less attractive than salary once companies are out of the 0% CT starting rate ?

Thanks

Daytona

No. First of all, employer's NI isn't 12.8% of the money available from which to remunerate the employee, but 12.8% of the nominal salary, and it is that salary *plus* the employer's NI which adds up to the money available. But that's a minor point.

Secondly, what new rules? All there is is speculation, we don't even know there will be "new rules", never mind what they are likely to be. If the intention is to target one-man companies, as opposed to ordinary shareholders, it would seem more likely that they would deem them to be self employed and make them cough up class 4 NICs at

8% on the fist £26325, and 1% for the rest.

An even simpler option might be, instead of applying NI, simply to remove the tax credit from dividends, or to restrict it to 10%, but again that would need to be applied selectively if they don't want to target ordinary investors.

It already is 10%.

Robin

Or did you mean restrict the dividend tax credit to only cover the liability for

10% lower rate income tax?

There an article about what might happen, here:

4

Robin

Sorry, what I meant was that the "middle" rate of income tax for dividends could be increased from its current 10% rate without making a corresponding increase to the rate of tax credit. The higher rate could be increased too.

To explain further, let me add that I had been under the mistaken impression that dividend income was taxed at 10% in the lower band,

22% in the middle band, and 32.5% in the higher band, and that the tax credit built into dividends was 10% for the purpose of grossing up, but was 10% or 22% as required to cancel out liability in all but the higher rate bands.

Accordingly, by suggesting it might be restricted to 10%, I sought to imply it would mean paying 12% in the middle band.

In fact the middle rate for dividends is the same as the lower rate, i.e. 10%, and so to achieve the same effect they would not need to fiddle with the rate or restriction of tax credits, but would just have to increase the middle rate.

Fair enough - thanks - I'd missed that !

I didn't realise that - I was on a course the other day where an IR person mentioned that IR35 had been extended and there was now no advantage in going Ltd for dividend tax efficiency reasons.

Thanks for detailed response !

Cheers

Daytona