Government responds to dividend tax petition

The government is taking a ‘carrot and stick’ approach in batting away critics of the new dividend tax which will bite from April 2016.

Dangling the ‘carrot’ in front of more than 25,000 people who signed an online petition against the proposal, the Treasury said the tax would allow “further cuts in corporation tax”.

Indeed, it is not possible to continue to reduce the corporation tax rate without looking at the tax system as a whole, including the taxation of dividends, the department argued on Friday.

Brandishing the ‘stick,’ it said the “incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill” needed reducing.

“Lowering the corporation tax rate without action elsewhere increases incentives for individuals to [take part in]…tax motivated incorporation,” the signatories were told.

“These reforms, which will also simplify the dividend tax system…[ensure] taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation.”

Appearing to address incorporated businesses, the Treasury said that in spite of the dividend “reforms,” such businesses will “continue to pay lower rates of tax than the employed or self-employed.”  

Still seeming to address existing companies, it pointed to a range of measures at Summer Budget 2015 that, it suggested, show the government as “fully committed to supporting businesses and entrepreneurship.”

One measure it highlighted was reform to the National Insurance Employment Allowance which, although increasing for some businesses, was stripped at the Budget from the directors of one-person limited companies.

Most of them will also be significantly worse off due to the dividend tax, but its effect will be to “move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall,” the Treasury claimed.