Osborne's dividends raid valued upwards of £6bn

George Osborne rewriting the rules on dividend taxation will raise more than £2billion a year, making it one of the biggest revenue raisers of Summer Budget 2015.

In fact, the chancellor replacing the dividend credit with an allowance and hiking rates will net £6.8bn over this parliament, aside to the £500m it will raise by reducing tax-led incorporations.

This package of dividend reforms (widely seen as the biggest shake-up to dividends since 1998) is one of the Budget’s “main” tax-raising proposals, says UHY Hacker Young.

Indeed, while the removal of the NI Employment Allowance will also hit directors who are their firm’s sole employee, it will raise a comparatively small sum; just £100m a year.  

The more lucrative dividend reforms – being denounced as a “tax on success” – are therefore vital to a chancellor who, in total, is putting up taxes by £6bn a year by 2020.

The reforms’ £6.8bn contribution (over the parliament) is even easier to appreciate when considering that last week’s Budget contained tax increases that will raise £47bn, the Office of Budget Responsibility has calculated.

Seeming to try to put this latter figure into context, the OBR’s chairman Robert Chote has said that Mr Osborne’s “tax increases are roughly twice the size of the tax cuts in aggregate.”

An imprecise example in the contractor sector is the personal allowance being set £600 higher (from 2017), just as the NI Employment Allowance – worth £2,000 – is being axed.

“There is quite a lot in [the Budget red book] which has the potential to increase the tax burden on contractors”, Jason Piper, technical manger of tax and business law at the ACCA told ContractorUK yesterday.

He added: “At least in the short term, changes to the Employer Allowance and dividends taxation [both of which take effect from next April] will take more money out of contractors’ pockets.”

In line with this reading, Blick Rothenberg calculates that a person with no other income who currently receives about £38,000 of dividend income tax-free will, from April, face a tax bill of £1,700.

The accountancy firm believes that the dividend tax hike – an effective 7.5% increase in rates – will end up “discouraging entrepreneurial activity and enterprise”, reported City AM.

On behalf of its members, the Forum of Private Business agrees. “Changes on how dividends are taxed may, in effect, be a tax on success”, the enterprise support group said.

“Small business owners, who pay themselves last, are [going to be] left with a tax bill when they finally reward themselves for good company performance.”

Accountancy giant PwC has confirmed that the dividend tax reforms will "fall disproportionately on" owner-managers. It may also see many of them considering selling-up early.

Nick Farr of PwC said: “Some of them will perhaps start to consider whether they do indeed want to continue with their business or whether they would rather retire and sell, and benefit from the 10% entrepreneurs’ relief.”

And tax-motivated winding up – perhaps even before the April 2016 “Dividend Allowance” applies – may not be the only side-effect.

“It will be an important that the system does not end up leaving incorporated contractors worse off than their sole-trader [counterparts],” warned the ACCA’s Mr Piper.

“All too often the ‘choice’ to incorporate is actually forced upon contractors by more powerful [businesses] for their own commercial ends, and that distortion of the marketplace should not be compounded by tax penalties.”

These presumably unintended side-effects of the dividend reforms, combined with the hefty tax take, seem to explain why UHY Hacker Young reportedly says limited companies are likely to feel under “direct attack.”

A tax advisory to such dividend-drawing firms, DNS Associates, last night explained why. “I cannot see so much pressure on larger business, but smaller business that are owner-managed are being put under huge pressure from this Budget,” said managing director Sumit Agarwal.

“If PSCs are the way forward [due to umbrellas being first in line for an expenses clampdown] then the extraction of huge amounts of tax from PSCs is going to happen. [The government] is trying to kill limited company contracting or [at least wants to] make it harder to make a good living from it.”