4 ms·

To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. I used to be a self-employed c

by pmyteh 9y ago

To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. I used to be a self-employed consultant. The number of my peers who set up one-man companies, stayed (or claimed to stay) just a whisker outside IR35 and paid themselves in dividends was astonishing. I see no reason why dividends from a company with no fucking capital should be seen as anything other than regular taxable income.

Silhouette 9y ago
To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. Not once you take the already applied corporation tax into account, though. Then the overall tax rate is around 5% above regular income tax, with the exact difference depending on which tax band you're looking at. Of course you can argue that employees also pay NI on PAYE salary, but if you're going to go down that path then really you also have to consider that employees get paid time off, pension contributions, etc. that their employer is footing the bill for. Again that leaves the balance quite heavily in favour of being employed rather than going independent, even if the employer provides only the statutory minimum PTO and pension contributions. Operating through a limited company wasn't particularly cost-effective even before the dividend tax change if you were actually running a real business and taking on the usual costs/overheads/risks of any other business, unless you were able to take advantage of something like Entrepreneur's Relief following an exit (and willing to accept the slightly strange limitations that come with that). Otherwise, it mainly only worked in favour of people like the ones you mentioned, who weren't running a real independent business at all and were simply skirting the law in an effort to abuse the tax system -- effectively, taking most of the perks of being an employee, yet getting the tax advantages of not being one. If the government had any idea what it was doing with the small business sector, it would surely have dumped IR35 and brought in a more suitable replacement to deal with that situation long ago. There was no need to hit all the legitimate businesses as well.
- fauigerzigerk 9y ago
  >Not once you take the already applied corporation tax into account, though That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. The whole dividends question is purely about how much less you pay than regular employees.
  - Silhouette 9y ago
    That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. Right, but then if you go from being someone's employee and performing some work for them to being an independent performing the same work for the same fee, the only thing that has changed is that now you're also paying all the employer's overheads and taking on all the employer's risk. This makes no sense. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. No, taxes + NI paid by regular employees + NI paid by employers + employers' obligations in terms of paid time off, pension contributions, and all other overheads is your upper bound. The whole dividends question is purely about how much less you pay than regular employees. You don't get a dividend for being an employee, you get a dividend for owning a business, as compensation for investing so that that business can exist. The two are not equivalent in any meaningful way.
    - fauigerzigerk 9y ago
      I don't think employer overheads matter for the question at hand, because it is effectively employees who pay employer overheads through reduced salaries. After all, an employee's work has to pay for itself after deducting all directly related cost, regardless of who makes the actual payment to HMRC. Obviously the rate you charge would not stay the same if your effective tax rate goes up, but that's beside the point as it affects your competitors equally (at least British ones). >You don't get a dividend for being an employee, you get a dividend for owning a business, as compensation for investing so that that business can exist. The two are not equivalent in any meaningful way. The two are very much equivalent for a large number of small businesses, such as software development and consulting services (not just single person companies). Investment is negligible and the only thing you own is your own reputation. But I get your point that the distinction does matter for other types of businesses, and I agree that the dividend tax increase makes investing in (or starting) these types of businesses less attractive. I'm not too happy about it myself to be honest.
sokoloff 9y ago
I think profits sourced from direct labor are clearly close to wages. Profits sourced from retainers, from sales/licensing of software, from offering support contracts, and the like I could easily see as being "different from wages".
- Silhouette 9y ago
  I think profits sourced from direct labor are clearly close to wages. It's important to remember that in places like the UK, there are very different ways to offer that labour. In particular, as an employee, you have considerably more protection and are entitled to considerably more in other benefits than a freelancer or contractor who operates independently. As a reference point, you might expect an independent professional to charge roughly 150-200% of the equivalent salaried position in fees to compensate for the uncertainty, loss of benefits, overheads and other downsides that an employer takes care of for its employees. (This is of course ignoring the whole issue of now dealing with clients on a B2B basis instead of an employer-employee relationship, and therefore potentially pricing according to value rather than time, as often discussed elsewhere on HN.) Treating the income from dividends as if it were equivalent to a salary just means that either it's not cost-effective to go independent or clients have to bear the extra cost. Either way, someone is paying the difference if the work is still getting done at all, and like any activity that is taxed, that is an economic barrier that is not necessarily helpful if you're trying to promote a business environment where there is a flexible supply of labour through freelancers and where new businesses can start and grow.

by pmyteh 9y ago

Silhouette 9y ago

To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. Not once you take the already applied corporation tax into account, though. Then the overall tax rate is around 5% above regular income tax, with the exact difference depending on which tax band you're looking at. Of course you can argue that employees also pay NI on PAYE salary, but if you're going to go down that path then really you also have to consider that employees get paid time off, pension contributions, etc. that their employer is footing the bill for. Again that leaves the balance quite heavily in favour of being employed rather than going independent, even if the employer provides only the statutory minimum PTO and pension contributions. Operating through a limited company wasn't particularly cost-effective even before the dividend tax change if you were actually running a real business and taking on the usual costs/overheads/risks of any other business, unless you were able to take advantage of something like Entrepreneur's Relief following an exit (and willing to accept the slightly strange limitations that come with that). Otherwise, it mainly only worked in favour of people like the ones you mentioned, who weren't running a real independent business at all and were simply skirting the law in an effort to abuse the tax system -- effectively, taking most of the perks of being an employee, yet getting the tax advantages of not being one. If the government had any idea what it was doing with the small business sector, it would surely have dumped IR35 and brought in a more suitable replacement to deal with that situation long ago. There was no need to hit all the legitimate businesses as well.

fauigerzigerk 9y ago
>Not once you take the already applied corporation tax into account, though That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. The whole dividends question is purely about how much less you pay than regular employees.
- Silhouette 9y ago
  That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. Right, but then if you go from being someone's employee and performing some work for them to being an independent performing the same work for the same fee, the only thing that has changed is that now you're also paying all the employer's overheads and taking on all the employer's risk. This makes no sense. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. No, taxes + NI paid by regular employees + NI paid by employers + employers' obligations in terms of paid time off, pension contributions, and all other overheads is your upper bound. The whole dividends question is purely about how much less you pay than regular employees. You don't get a dividend for being an employee, you get a dividend for owning a business, as compensation for investing so that that business can exist. The two are not equivalent in any meaningful way.
  - fauigerzigerk 9y ago
    I don't think employer overheads matter for the question at hand, because it is effectively employees who pay employer overheads through reduced salaries. After all, an employee's work has to pay for itself after deducting all directly related cost, regardless of who makes the actual payment to HMRC. Obviously the rate you charge would not stay the same if your effective tax rate goes up, but that's beside the point as it affects your competitors equally (at least British ones). >You don't get a dividend for being an employee, you get a dividend for owning a business, as compensation for investing so that that business can exist. The two are not equivalent in any meaningful way. The two are very much equivalent for a large number of small businesses, such as software development and consulting services (not just single person companies). Investment is negligible and the only thing you own is your own reputation. But I get your point that the distinction does matter for other types of businesses, and I agree that the dividend tax increase makes investing in (or starting) these types of businesses less attractive. I'm not too happy about it myself to be honest.

sokoloff 9y ago

I think profits sourced from direct labor are clearly close to wages. Profits sourced from retainers, from sales/licensing of software, from offering support contracts, and the like I could easily see as being "different from wages".

Silhouette 9y ago
I think profits sourced from direct labor are clearly close to wages. It's important to remember that in places like the UK, there are very different ways to offer that labour. In particular, as an employee, you have considerably more protection and are entitled to considerably more in other benefits than a freelancer or contractor who operates independently. As a reference point, you might expect an independent professional to charge roughly 150-200% of the equivalent salaried position in fees to compensate for the uncertainty, loss of benefits, overheads and other downsides that an employer takes care of for its employees. (This is of course ignoring the whole issue of now dealing with clients on a B2B basis instead of an employer-employee relationship, and therefore potentially pricing according to value rather than time, as often discussed elsewhere on HN.) Treating the income from dividends as if it were equivalent to a salary just means that either it's not cost-effective to go independent or clients have to bear the extra cost. Either way, someone is paying the difference if the work is still getting done at all, and like any activity that is taxed, that is an economic barrier that is not necessarily helpful if you're trying to promote a business environment where there is a flexible supply of labour through freelancers and where new businesses can start and grow.