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>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

>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.
  - Silhouette 9y ago
    Obviously the rate you charge would not stay the same if your effective tax rate goes up In time, that may become true, assuming the market will bear the higher rates. Even that won't necessarily happen, because at some point the higher direct costs of bringing in flexible labour may start to outweigh the benefits of not hiring in-house staff. And as you say, in some industries, there is also the risk of being undercut by cheaper competition working in lower tax environments abroad. In any case, in the shorter term, you can't just turn around to existing clients and say you're putting their rates up because your taxes changed. You've already got contracts in place and agreements made, and the risk of the business environment changing is borne by the contractor/freelancer/consultancy. 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). I don't think that's entirely true even if the direct financial investment in starting the business is low. There is still some overhead, because you have to deal with business paperwork, preparing and filing annual financial statements, in many cases administering a pension scheme these days, handling all the tax and accounting overheads, etc. More importantly, when you go independent you take on a lot more risk and give up a lot of the security and benefits that come with being an employee. The benchmark of 50-100% higher fees than salary for a similar position is mostly not caused by direct financial differences, it's caused by the uncertainty and inefficiency that come from working from one gig to another, needing to take time out to find new clients and set up new contracts, and so on. In other words, you have to cover the fully loaded cost of an employee to an employer, and you have to do it without the economies of scale of a larger business when you first start (and possibly for much longer). So even for those businesses with relatively little up-front capital investment, there is still a lot of investment in other respects that goes into getting a business started and keeping it going. And this brings me back to my basic point that if you try to equate income received by an employee with income received through an independent business, even if you allow for the direct financial effects like employers' NI contributions, it's still very hostile to small businesses to increase dividend tax dramatically as the UK government did not long ago.
    - fauigerzigerk 9y ago
      Perhaps the dividend rate for entrepreneurs who run the company should not be the same as that for investors, similar to entrepreneur's relief on CGT.

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.
- Silhouette 9y ago
  Obviously the rate you charge would not stay the same if your effective tax rate goes up In time, that may become true, assuming the market will bear the higher rates. Even that won't necessarily happen, because at some point the higher direct costs of bringing in flexible labour may start to outweigh the benefits of not hiring in-house staff. And as you say, in some industries, there is also the risk of being undercut by cheaper competition working in lower tax environments abroad. In any case, in the shorter term, you can't just turn around to existing clients and say you're putting their rates up because your taxes changed. You've already got contracts in place and agreements made, and the risk of the business environment changing is borne by the contractor/freelancer/consultancy. 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). I don't think that's entirely true even if the direct financial investment in starting the business is low. There is still some overhead, because you have to deal with business paperwork, preparing and filing annual financial statements, in many cases administering a pension scheme these days, handling all the tax and accounting overheads, etc. More importantly, when you go independent you take on a lot more risk and give up a lot of the security and benefits that come with being an employee. The benchmark of 50-100% higher fees than salary for a similar position is mostly not caused by direct financial differences, it's caused by the uncertainty and inefficiency that come from working from one gig to another, needing to take time out to find new clients and set up new contracts, and so on. In other words, you have to cover the fully loaded cost of an employee to an employer, and you have to do it without the economies of scale of a larger business when you first start (and possibly for much longer). So even for those businesses with relatively little up-front capital investment, there is still a lot of investment in other respects that goes into getting a business started and keeping it going. And this brings me back to my basic point that if you try to equate income received by an employee with income received through an independent business, even if you allow for the direct financial effects like employers' NI contributions, it's still very hostile to small businesses to increase dividend tax dramatically as the UK government did not long ago.
  - fauigerzigerk 9y ago
    Perhaps the dividend rate for entrepreneurs who run the company should not be the same as that for investors, similar to entrepreneur's relief on CGT.