Boris Johnson has dazed the self-employed sector by declaring a stunning increase in the dividend tax by 1.25 per cent. These taxes were hiked to fund the health and social care sector which was hit hard due to the Covid-19 pandemic.
In the Parliament PM Boris Johnson said: "It would be wrong for me to say that we can pay for this recovery without taking the difficult but responsible decisions about how we finance it.”
Tax rates on shareholder dividends will ascend by a similar percentage. It will start as a hike in the current National Insurance rate (a current tax on earnings) and will become different taxon earnings in 2023.
The hiked taxes will raise nearly £36 billion throughout the following three years, as indicated by PM Johnson, with cash from the levy going straightforwardly to Britain's health and social care sector.
“The 1.25% increase to the employees and employer’s NI rates and dividend tax rates means that, whether an owner of a contractor company takes dividends or salary, they are going to be making some contribution to the Care Levy. We have not been given a date yet for the new rates to apply but it is likely to be from April 2022. So taking a dividend before that date would avoid the tax increase,” Tim Stovold, head of tax at Moore Kingston Smith told ContractorUK in an interview.
Umbrella employees will be affected
While nobody can ignore the significance of getting social care financing, the 1.25% tax rise born by employees and employers will hit everybody and especially contractors pretty badly. Regardless of whether working inside or outside IR35, a contractor will currently confront greater expenses subsequently. In any case, it is lower-paid umbrella contractors who are probably going to face the issues.
Matt Fryer, head of legal at Brookson Legal commented, “The contract rate includes the employer costs which is predominantly employer’s NIC. This means that umbrella company employees will be hit twice as hard in terms of take-home pay impact than limited company contractors.”
Further explaining, he said, “It should be noted that the 1.25% applies to both employee NIC and employer NIC; so a 2.5% contribution [in total], but only 1.25% on dividends. Therefore employees and their employers will be contributing more than limited company contractors.”
To sum up:
Carl Emmerson Deputy Director at the IFS also said that “There is no good economic reason to start a third tax on income. The government could have simply achieved its aims without adding the complexities that come with having a third tax. In the short run, the extra revenues could be used on boosting health and social care spending. In the long run, hypothecation is an illusion.”
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