Diversity

Tax
59
entrepreneurial and favouring higher
self-employed earners at the expense
of low-middle income earners
etc. Following pressure from the
press and their own backbenchers,
the Government subsequently
announced on 15 March that it would
not proceed with the NIC changes. As
a result, the only substantive change
from a tax-raising perspective
announced in the March 2017 Budget
is the reduction in the Dividend
Allowance from April 2018 to £2,000.
So, was there merit to the
Chancellor’s argument that the selfemployed
are not paying their fair
share of tax? If we take an example
of a self-employed individual with
profits of £45,000 per annum and
compare this against an individual
who runs a company and also makes
a profit of £45,000 but extracts the
profits by mixture of salary and
dividend in the most tax-efficient
manner (but sufficient to give him
a national insurance record), the
results are quite revealing. Based
upon the proposed changes to the
dividend allowance, but keeping
all other rates and allowances the
same (which includes ignoring
the potential introduction of the
Northern Ireland corporate tax rate
from April 2018), the results are as
outlined in Table 1 above.
This table shows that it is possible
for self-employed individuals to pay
less tax by being employed through
their own companies and extracting
funds in a tax-efficient manner.
They are, meanwhile, entitled to
the full range of benefits to which
employees are entitled, although the
reduction in the Dividend Allowance
will reduce the differential from
next year. The example ignores
other issues around deductibility
of expenses and costs of being
Tax Year 2017-18 2018-19 2019-20
Self employed
Profits
Income tax
National insurance
- Class II
-Class IV
Net income after tax
Company owner
Profits
Salary
Profit before Tax
Corporation Tax
Profit after Tax
Dividend
Retained Reserves
Salary
Dividend
Income Tax
National Insurance
Net income after tax
45,000
(6,700)
(148)
(3,315)
34,837
45,000
(8,164)
36,836
(6,999)
29,837
(29,837)
Nil
8,164
29,837
(1,613)
-
36,388
incorporated, but it clearly destroys
the myth that individuals set up as
self-employed solely to pay less tax.
So what is the Chancellor going
to announce in his Autumn Budget
to replace the additional £2.2
billion of Class IV NIC revenue no
longer coming his way next year?
Any proposed tax-raising policy
will now be first cross-referenced
with the Conservative Election
Manifesto to make sure it passes
that test. That means no increases
in the headline rates of income
tax, national insurance and VAT.
This will inevitably lead to further
tinkering of the tax system and more
complexity as the Chancellor finds
a way to tinker with various reliefs
and allowances. Future changes
45,000
(6,700)
-
(3,315)
34,985
45,000
(8,164)
36,836
(6,999)
29,837
(29,837)
Nil
8,164
29,837
(1,838)
-
36,163
could include a further reduction
in (or removal of) the Dividend
Allowance, which received very
little negative press, despite raising
more tax than the proposed national
insurance tax rises; a change in the
dividend tax rate; and higher rate
tax relief restrictions for pension
contributions. As ever, the Chancellor
of the day will have to walk the
tightrope between balancing the
books and maintaining political
credibility and popularity. The loser
in all this will most likely be tax
simplification.
SEAN LAVERY
Sean Lavery FCA is Tax Partner
at BDO Northern Ireland.
45,000
(6,700)
-
(3,315)
34,985
45,000
(8,164)
36,836
(6,999)
29,837
(29,837)
Nil
8,164
29,837
(1,838)
-
36,163
Additional tax paid
by self-employed
worker 1,551 1,178 1,178
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