Wedge: Meet Thin End

The post below was originally written in response to George Osborne's July 2015 Budget. Given the latest Chancellor's guesswork yesterday, I thought it worth re-posting.

 "  HatTip  " is written by Nick Lincoln, IFA

"HatTip" is written by Nick Lincoln, IFA

"Dear George

I am a basic rate taxpayer. When, on 8th July 2015, you sat down after your Budget, I was nearly £2,000 a year worse off because of changes to the tax regime.

Yet the media lauded your Budget as a tax-cutting success. How did this discrepancy arise? It arose because I am the owner of a small business and I remunerate myself via salary and dividends.

8th July 2015 marked the day when the Conservative party finally ditched any pretence to being the party of small business; the era of “crony capitalism” (corporatism) is now accepted and openly touted by the establishment. Small business is so “yesterday”.

So yes, I have a vested interest in whingeing. I admit it. But let me put to paper my thoughts on why this new taxation of dividends is so damaging.

First, let us dismiss the pernicious myth that somehow paying oneself via dividends means you are avoiding tax. This is nonsense; every penny of dividend income I receive has come out of business profits already taxed once via Corporation Tax.

The compact between the State and the business owner was that the State would take its share via this tax and whatever was left over was yours. There would be no further tax to pay (unless you had the temerity to take dividends that put your income into the 40% tax band - hey big spender!)

The State recognised that, as a small business owner, you were running incredible risks. The State understood that there was no benevolent employer looking after you; that there was no company pension scheme waiting for you to join; there was no employer sick pay or life cover or employment “rights”. It was just you, the marketplace and your offering.

The State saw that, if small businesses flourished, they would grow and employ people. These employees in turn would pay Income Tax, National Insurance etc.

 A dividend certificate, as spotted yesterday

A dividend certificate, as spotted yesterday

The quid pro quo was that the State would not tax business owners as heavily as PAYE employees, a vast number of whom enjoy all of the above benefits.

That compact has now been blown away; the State will continue to tax you first on every penny of your profits (for, unlike Income Tax,  there are no allowances with Corporation Tax) and now tax you again when you extract what remains, bar a truly pathetic £5,000 “dividend allowance”.


Of course, this is where dividends meet the thin end of the wedge. Once a tax is introduced it never seems to go away. A 7.5% tax on dividends could just as easily be 17.5% or 27.5% whenever a future Chancellor needs more of our money. The door has been opened.

continues....

{above Emphasis added March 2017. A "future Chancellor" has of course just done pretty much this, in reducing the annual dividend allowance to just £2,000}


....continuation

This is the country of the “butcher, baker and candlestick maker.” It is built on commerce, on entrepreneurship, on the collective risk-taking of hundreds of thousands of people who have had the courage and conviction to go it alone. These same people may now be thinking “why bother?”

Not every small business will become a big business, either through choice or because of business failure. But every  - every - big business was once a small one: the ramifications of this ideological sea change from a purported Tory chancellor could be catastrophic.

As ever, the outcomes will not be felt until you and your generation of politicians have long departed, to retire on your (taxpayer funded) final salary pensions. You know, those pension schemes that small business owners have not a hope in hell’s chance of ever enjoying!

Anyway, hope you are well and that the family is OK. Speak soon.

Yours sincerely


Nick

 

{The above is not specific financial advice aligned to your unique circumstances and requirements. If you act on this article without first reading your own body weight in Key Features Documents, personal illustrations and fund fact-sheets then you may well be struck down by lightning.}
© 2017 Nick Lincoln