Weekend reading: Bashing the budget

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• 1 Retirement Investing Today March 11, 2017, 3:49 pm

  Hi TI

  I’m particularly frustrated at the constant pension meddling that has gone on in recent years (via budgets and of course other ad hoc tinkering). It’s just unrelenting and they had another go in this weeks budget around QROPS. How people can be expected to plan their lives amongst the constant change is just beyond me. We won’t have to wait long for the next fiddle either as I understand another “State Pension age review” has to be published before the 07 May 2017.

  All indications are that I’ll still be able to get access to my private pension at 55 which is more than some people by the look of it. I’m now looking at how to get it all out of pension wrappers without being destroyed by tax as the risk is just becoming unacceptable and my Med plans may just make it possible.

  As far as the State Pension is concerned I’m assuming that ladder will have been firmly pulled up on me. Much like UK housing and EU freedom of movement I guess…

  Still I’m not going to get too depressed over it. I think my Med FIRE is still very much achievable which is keeping the smile firmly on my face.

  Cheers
  RIT
• 2 TT March 11, 2017, 3:52 pm

  It sounds to me like Barel should read Swedroe’s recent Factor Investing book, if the main reason he didn’t find Shrinking Alpha compelling was distrust of factors against data mining.
• 3 hosimpson March 11, 2017, 4:20 pm

  The incessant changes to this and that and the other have been frustrating. I don’t think this is going to change anytime soon though.
  The tories have blown a hole in the budget with brexit and they are looking for a way to fill it while losing as few votes as possible.
  I’ve always said that, as far as risk of changes to economic policy and/or taxation goes, the safest place to be is in the middle of the herd. Politicos tend to make rules that benefit the majority of their electorate. Sadly, herd-wise, the FI community is quite far in the outskirts. Its best hope is to fly under the radar and slip though the net.
• 4 Gregory March 11, 2017, 4:33 pm

  I suggest Mr. Karson should read Larry’s new book too. He argues in it that a factor should be persistent, pervasive, robust, investable and intuitive (there must be logical risk-based or behavioral-based explanations (or both) for the premium and why it should continue to exist).
• 5 Gregory March 11, 2017, 4:51 pm

  Every article about passive (and active) investing convinces me that passive will work because it painfully hard to follow and to do nothing. There are too many investment ideas that influence You and You can’t ignore them. It is like a child in the candy store. No pain no gain.
• 6 Steve March 11, 2017, 4:52 pm

  As luck would have it, a Conservative polling team knocked on my door 10 minutes before your post went up. The combo of my EU wife’s “bargaining card” status + me being self-employed led to a short but frank chat before I closed the door.

  My irritation is kind of annoying. Part of me has expected a NIC change since self-employed people benefited from the ‘flat rate’ state pension changes. I think I’m more irritated by the half-arsed way it was done, then apparently undone. It makes them look like amateurs – which is NOT what I want to see as they start the Brexit negotiations. If they’d knocked on my door a week later they’d have got a more nuanced response. Still, if the message “stop buggering people about” gets passed up the party food chain some good might come of it.
• 7 Rob Taylor March 11, 2017, 5:13 pm

  There’s a problem with people pretending to be self employed or their own ltd companies to get the tax advantages but the proper solution would be to tighten up enforcement of the existing regulations rather than applying a blanket tax rise which also affects legitimate self employed people and ltd companies. The latter is of course the easier solution and that Hammond has taken that route is probably a good indicator of things to come. The easy option over the right one. Laziness. Ineptitude. Sadly they have no opposition so we’re stuck with him, and May who is looking weaker by the week.
• 8 Neverland March 11, 2017, 6:02 pm

  Before budget: moans about crisis in social care and “unfair” rises in business rates in London

  After budget: moans about tax rises on self-employed and probate fees to pay for sticking plaster solutions to above

  Usual story: everyone wants money from government but no one wants to pay taxes to fund this

  Result: government debt of £1.7tr and rising
• 9 FI Warrior March 11, 2017, 7:58 pm

  Funny how there’s always ‘whatever it takes’ money for any given war though, or banker bonuses, or CEO salaries, or tax-back for the 1%, or giveaways aimed at the housing bubble to keep the pressure squeaky tight. A cynic might be forgiven for thinking it’s ideologically driven or something. You can tell times have gotten harder when even the average person at least knows they should pay attention to the budget; years ago it was only for nerds, economists, business-people and politicos to pore over. This must be a purple patch for the financial advisors.
• 10 dearieme March 11, 2017, 8:54 pm

  “Usual story: everyone wants money from government but no one wants to pay taxes to fund this”: zactly. Bastiat: The State is the great fiction through which everyone endeavours to live at the expense of everyone else.

  (L’Etat c’est la grande fiction à travers laquelle tout le monde s’efforce de vivre aux dépens de tout le monde.)
• 11 Richard March 11, 2017, 8:55 pm

  The only pay rise most people will probably get is the change to the tax thresholds. I think this is partly why the government is doing it. Employer don’t want (or can’t) offer pay rises but the government makes sure there is still an increase in disposable income that either off sets price rises or helps to push up economic growth through spending. Of course they need to find this money from somewhere else (esp for the higher tax rate threshold increase)
• 12 John March 11, 2017, 8:58 pm

  Is there any intention to do an article on the Lifetime ISA early in the new financial year? Purely selfish reasons as I turn 40 early May so keen to hear your thoughts before it’s too late for me.

  Thank you for the site – been great for me.
• 13 The Investor March 11, 2017, 9:31 pm

  @John — Cheers, glad you’ve found us useful! To be honest I was hoping they’d scrap the Lifetime ISA, but it looks like the thing is coming in now. So will probably do something anon.
• 14 John March 11, 2017, 9:41 pm

  I did sense that opinion towards it, but an article would be appreciated – thank you.
• 15 Lee March 12, 2017, 12:21 am

  I daren’t read that article about Standard Chartered. I sold it off, as the last remaining individual stock in my portfolio, last week for a 40% loss. Months of dithering now finally over….
• 16 Mr optimistic March 12, 2017, 8:23 am

  Yes I hoped the daft lifetime ISA would go to. Osborne was a real nuisance with his complicating changes. I think salary sacrifice is next on the chopping block.
• 17 abracadabra March 12, 2017, 10:59 am

  I need to brush up on your article (http://monevator.com/how-uk-dividends-are-taxed/) as I always find dividend tax confusing. I moved overseas, so can no longer use ISA’s. As I don’t expect a state pension, my hopes of FI are pinned on having a substantial stock & bond portfolio. Am I right in think that as long as my dividends don’t go over the basic rate I’ll only be taxed 7.5%?
• 18 Luke March 12, 2017, 12:02 pm

  One of the Chip sites is Money Bulldog, which seems to big up friendly societies. Be careful out there!
• 19 Sara March 12, 2017, 12:26 pm

  Have to agree with Neverland on everyone wants services but no one wants to pay for them.
  The amount of fuss over the self-employed increase is depressing if we actually want any public services in the future. You’d think they’d been asked to pay £700 extra per week rather than the 70 pence it actually is. Same people who probably blow £100 every weekend on booze. Or is it that all these Tory MPs are employing their spouses on self-employment contracts and aren’t happy to pay any extra out of their multi-millions. Are all the journalists self-employed too?
  At least the booze is taxed, I guess.
• 20 Dave March 12, 2017, 4:50 pm

  It’s worth pointing out that self-employed people do not have access to the many benefits the normally employed get. These include maternity / paternity benefits, sick pay, holiday pay, employer funded pensions, etc. In recompense they get a few pence off NI which the majority of comments above seem to think is unfair. How?

  The self-employed live with the constant fear of where the next batch of money is coming from, which business will stiff them next with late payments and the constant search for new business while juggling family and business lives. There is no redundancy payment when you lose your self-employed job – just probably losing your house.

  The large increase in the type of ‘self-employed’ person who actually works for just one company eg. amazon courier, deliveroo, consultant, etc. is the actual problem. Stopping companies outsourcing staff who are really employees so they can avoid paying NI and the various other benefits is what really should be clamped down on. Those people are actually employees and should be recognised on payroll as such. Perhaps there should be a minimum hours worked clause to determine actual employment at a company? If this was set at say 10 hours / week, then all these ‘self-employed’ would be rightly re-classified as employees.

  Neverland mentioned that everyone wants their slice without having to pay for it, yet the tax take in this country runs at 25% of GDP putting it in the top 15 countries in the world. The money is poorly spent and distributed to the wrong sections of society. Brexit seems like the perfect opportunity to solve various tax issues and create a balanced government budget. If you were starting again there’s no way you’d adopt the tax code currently in place – at last count it is the largest in the world. The Office of Tax Simplification was set up to reduce the complexity and yet they’ve done almost nothing. A bonfire of taxes, credits, subsidies and reliefs is due. Now seems an ideal time to start again.
• 21 CollReg March 12, 2017, 5:28 pm

  Why so much hate for the Lifetime ISA?

  As a young non-home owner it fixes some of the problems with the Help To Buy ISA (very very low contribution limit, low house price limit), and even after that it incentivises saving for retirement (admittedly savers shouldn’t put all of their eggs in the Lifetime ISA basket).

  I get that there are arguments against giving cash handouts to the comparatively well off (because they can afford to save), but for as long as governments (of any colour) refuse to properly address the core issue of a persistently over-inflated housing market, this is at least a small redistribution to balance the scales a bit for my generation.
• 22 arty March 12, 2017, 6:35 pm

  @dave. We seem to have reached some sort of consensus that a civilised society needs some level of taxation to provide services. Somebody needs to pay this. I can’t see why you should be exempt (and I don’t want to subsidize you) just because you’re worried about your next customer or losing your job.
  Big company, small company, one man band – if somebody thinks they deserve better “maternity / paternity benefits, sick pay, holiday pay, employer funded pensions” then they should take it up with their employer. If the company isn’t viable if it provides these perfectly reasonable benefits, then it’s not viable – so be it.
• 23 William III March 12, 2017, 7:36 pm

  It’s worth scanning the recent IFS paper on the issue:
  https://www.ifs.org.uk/publications/8873

  “Our tax system is much less favourable to the 85% in employment than it is the 15% who work for themselves. The tax differences are small at lower earnings levels but substantial for higher earners. For example:
  – At £15,000 (employer cost), tax on employees is £631 a year higher than if the income was earned by a self employed person and £818 higher than if earned by a company owner manager;
  – At £40,000 the differences are £3,442 and £4,557 respectively;
  – At £100,000 the differences are £7,365 and £8,035 respectively.”

  As for high tax burden in UK: it’s higher in North West Europe and Scandinavia. But then we wouldn’t want THAT sort of equal society would we.

  By the way, this whole discussion even ignores the blatant abuse of expenses through businesses. A recent ft article on the IFS report had a comment that summed it all up rather neatly, eg wife’s car on the business, fam holidays and dinners expensed as client relationship building, kids summer jobs etc etc.

  (I do apologise for the tone, just returned from an eye opening weekend in the Surrey hills; unbelievable the sort of conversations you might accidentally overhear in the better pubs. The divide in this country is jaw dropping indeed.)
• 24 Neverland March 12, 2017, 8:29 pm

  @Dave

  I’m currently next door to an office of a fairly big multinational who are making something like 10-15% of their 000s UK workforce redundant, so the issues you speak of are merely inherent in the nature of work

  Equally I’m sure there are plenty of former UK public sector workers who would concur that risk of redundancy is not exclusive to the private sector

  I’ve been various employed and self-employed, but for someone earning a higher than average UK profit or wage, the UK is pretty generous to the self-employed vs. the employed

  The second most egregious example is entrepreneurs relief from cgt which applies to the first £20m of lifetime gains per couple: https://www.gov.uk/entrepreneurs-relief/eligibility
• 25 Neverland March 12, 2017, 8:36 pm

  @WilliamIII

  Overheard in a chichi shopping center outside Hugo Boss about a year ago:

  “….so he pays his wife a salary and £5,000 in dividends, his daughter a salary and £5,000 in dividends, his son a salary and dividends and its all tax free….”
• 26 The Investor March 12, 2017, 9:07 pm

  @Neverland @others — I don’t see that picking egregious examples of people abusing the system means that the system is wrong, anymore than I think we should scrap welfare entitlement for everyone because of the sort of antics you see on the TV show Benefit Street.

  If the sons / daughters aren’t working then they shouldn’t get a salary. Etc.

  Clearly as others have said the employed / not-employed dichotomy is another of these big opinion gulfs in society. It’s easy for me to hop onto my own hobby horse. 🙂 I’d go so far as to say one reason I left employment was the realization that I was to some modest extent one of the employees who was carrying the not trivial number of fellow employees who were regularly sick, running errands, late, didn’t do much when they were in the office, maxed out their holidays via cunning bank holidays, etc etc.

  I’d happily wager the self-employed add more productivity on average per person because they actually do the work or they don’t get paid. The properly* self-employed people I know, particularly the freelancers, tend not to even take holidays in the early years.

  Indeed perhaps one justification** for taxing employees more than the self-employed is it’s a very enforceable form of corporate tax, extracted via the employed workforce, whether productive or less so!

  Why should we care about self employment / limited companies?

  Firstly, I think flexibility of a labour market has been a huge advantage. People are understandably aggrieved about low real pay rises, but we forget the predictions of millions unemployed that came with the recession. In reality flexibility both among the employed and the self-employed/start-up spectrum helped keep the economy ticking over and joblessness down, compared to countries as different as Spain and the United States.

  Secondly I’d say it encourages entrepreneurial activity and risk taking. This seems self-evident, although there are counter arguments. (One trivial one — I recently heard a stat claiming of the developed economies the US has the lowest rate of self-employed and Greece the highest! So that doesn’t really fit the entrepreneurial received wisdom. Though Greece is no longer developed world, officially speaking, if I recall correctly. Anyway, clearly one could argue their inability to collect taxes may be connected to this state of affairs.)

  For me, as I said in my short and not particularly considered piece above, it’s not so much the specific changes, nonplussed though I may be about them. It’s the ad hoc nature of the changes, the lack of unifying plan. “Looking at” this and that statutory / rights imbalance in the future. Shoehorning support of self-employed people’s risk-taking onto a justification for lower NIC rates that was once in place for a very different reason on the other side.

  People can see the Heath Robinson air to our convoluted tax system, which on top of causing confusion via things like the speedy dividend allowance change breeds resentments and so on, and feelings that people are getting away with something.

  No doubt the system isn’t perfect and the world has changed a lot, and some are getting away with something. So do one big review and get one new system good for the next 20 years.

  But then my Sunday dinner today turned into a semi-shouting match between me, some very old friends, and family, when I tried to argue the merits of replacing it all with a simple 30% flat rate of tax for everything, combined with a tax-free personal allowance set at whatever level was deemed ‘fair’. (That word ‘fair’, how loaded it has become). And I’m not a politician who has to get elected…

  *For the record, I am just as aggrieved as everyone else by the ‘fake’ self-employed contractors who only seem to complain about the hardness of their jobs when tax changes are mooted. The contractors I know work 9-5, take great holidays etc, and stay at the same employer for years; they get all the favourable tax treatment, despite being basically employees, with the absence of redundancy pay-offs (which IS a very meaningful benefit to miss out on. I know several people who’ve had 6 months or more. When I’ve lost a client as a freelance, my main target is to make sure any outstanding invoices are paid! Employed friends are always astonished when my jaw drops when they discuss some potential redundancy offer.)

  It seems though this ‘fake’ self-employed-ness is too hard to sort out via IR35 and so on. More is the pity for real self-employed / small businesses.

  **I think there’s a case for 0% corporation tax, but let’s save that for another day. 🙂
• 27 The Investor March 12, 2017, 9:08 pm

  @CollReg — One reason is it’d be hard to think of two more mismatched investment aims then buying a house (deposit needed for the short-term, should be in cash) and investing for your old age (should be in long-term assets, should be as oblivious as possible to medium term volatility). And while I am fine with the State topping up the first tranches of pension saving, it’s hard to see how putting more money into the housing market will do anything other than push up prices. The BTL tax changes are much more likely, for instance, to eventually help more FTBs buy a home, IMHO.
• 28 dearieme March 13, 2017, 1:57 am

  “In recompense they get a few pence off NI which the majority of comments above seem to think is unfair. How?” You seem to have overlooked the employer’s NIC, the incidence of which falls on the employed, and which the self-employed are spared.
• 29 Neverland March 13, 2017, 10:21 am

  @The Investor

  “I’d happily wager the self-employed add more productivity on average per person because they actually do the work or they don’t get paid.”

  Except productivity growth in the UK is woeful compared to other advanced economies , from the below parliamentary report:

  “Since 2007, only Italy has seen weaker productivity growth than the UK among G7 countries” [page 8]

  file:///M:/Chrome/Download/SN06492.pdf

  …and almost all of the growth in employment since the recession has been from self-employment…

  https://www.parliament.uk/business/publications/research/key-issues-parliament-2015/work/self-employment/

  Therefore it seems unlikely that your statement is actually true
• 30 The Investor March 13, 2017, 10:39 am

  @Neverland — You could be right, my comment was of the “if we’re getting on our hobby horses” variety, as I flatly stated. 🙂 But while I see the logic in your data, my view probably wouldn’t really be swayed by data solely restricted to the post financial crisis period, which has been perculiar in all sorts of ways (e.g. initial hit to UK’s critical and out-sized financial services sector, relatively low unemployment but at likely cost to wages and career development etc, which seems to me to have been an almost explicit trade-off for keeping people around in work who weren’t 100% needed to earn the next £, very low interest rates potentially distorting investment decisions by companies, growth of gig economy which I doubt is being “captured” properly, high immigration, etc). UK productivity is a puzzle at the moment, as you’re probably aware.
• 31 Neverland March 13, 2017, 10:55 am

  @The investor

  Don’t worry I’m sure erecting huge tariff and non-tariff barriers into the UK’s largest 500m person export markets will surely cause a surge in Britain’s productivity and overall wealth, starting March 2019

  Oh… 🙁
• 32 Andy Watt March 13, 2017, 1:25 pm

  Surely the “Elephant in the room” (TM) is that NI is just another TAX that goes into the big bucket of taxes that the HMG then spend on stuff. NI does not go into a pot for, NHS, Maternity/Paternity Pay, Sick Pay, Social Security or anything else.

  Surely it’s time to just call it Income Tax and add the 12% NI most pay to Income Tax and show how much HMG really takes from our pay packets. It’s also a very regressive TAX as most of the burden falls on those between LEL and UEL, paying 12% with thise above UEL paying only 2%.

  Que rioting in the streets possibly.

  And don’t get me started on the change to Dividend Taxation.

  /RANT
• 33 L March 13, 2017, 3:37 pm

  @TI – what on earth is wrong with maximising your holiday allowance by tacking days onto bank holidays etc.? :p
• 34 The Investor March 13, 2017, 6:13 pm

  @L — It’s more a co-incident symptom. There’s nothing specifically wrong with it, except of course if everyone did it and businesses break. But they don’t, because as it happens, in my times in full-time employment — and as an employer for that matter — I noticed that disproportionately the people who did it were the same ones who had urgent medical appointments, were late or left early because of this or that issue, went mysteriously off-grid when out of office even in work hours, had child issues, rarely completed stuff to time, and claimed a day off sick every 3-4 weeks. (I’ve never taken a day off work as an employee of someone else’s business. Obviously there was some luck in that, but not entirely).

  Do any of the above larks when self-employed/running your own business and it’s on your dime. Do it as an employee and people like me (nothing special, I’d say I’m in the majority in not taking the p-ss) pick up the slack and cover for you.

  Anyway, as I have said a couple of times above in these comments (and your emoticon reveals you understand I think! 🙂 ) this part of my complaint is from the anecdotal/hobby-horse side of the ledger. 🙂

  My point wasn’t that I was seriously concerned or using it as a fundamental counterpoint to NIC changes, it’s to observe that this employed/self-employed division is another of these visceral splits at the moment, although not as strong as Brexit/Remain or Trump/not-Trump or London/provinces, etc.
• 35 The Rhino March 13, 2017, 6:36 pm

  curse those employees who leave the desk for urgent medical appointments and to care for their children. Does your hobby horse business have any employees? If so may I express my sincere condolences (for them)..
  But seriously, I’m still not totally convinced that dividend tax in the UK is a problem, it still seems pretty generous to me, albeit not quite as generous as it was?
  Its salary sacrifice that I would be heartbroken to see the end of.. a few pundits here seem to think that may be on the cards, I pray it isn’t..
• 36 John B March 13, 2017, 7:09 pm

  @Andy Watt actually NI is hypotheticated, see https://en.wikipedia.org/wiki/National_Insurance_Fund, its just the fund is always in surplus, and the money is ‘lent’ to pay for other general spending
• 37 The Investor March 13, 2017, 7:54 pm

  @TheRhino — Well, to the point is that because you’re an employee and you benefit from salary sacrifice, perhaps, but not from dividends as director say? And isn’t salary sacrifice also a way for employers to dodge National Insurance?

  This isn’t to have a go at you for wanting to see it stay, I’m just pointing out how parochial we are (as others have said up the thread. And which won’t stop me ranting from my corner again, of course 😉 )

  As for the employees, obviously any one of those things now and then is fine and a cost of business and supporting your staff.

  Perhaps I am alone in seeing them cluster repeatedly in certain individuals, to the point where it was a (small part of the bigger) motivation to work for myself. But I suspect not.
• 38 The Rhino March 13, 2017, 11:24 pm

  @TI – Yes absolutely – sal sac is currently an awesome wheeze to dodge NI, Income Tax and get your child benefit back, its absolutely unbelievable to my mind.

  I’m going to get hit by the dividend changes, but for sure, not so bad as someone who pays all there salary as such. Its just that basic rate income tax @ 20% and basic rate divi tax at 7.5%, well that still seems pretty good on the divis to me.

  so it seems to go -> dividends, capital gains, income in terms of order of tax treatment attractiveness, so you want to arrange your income in roughly that order?
• 39 John B March 13, 2017, 11:49 pm

  @Rhino that may be the order for tax ratess, but the allowances 11100 CGT, 11000 income 1000 interest 5000/2000 dividends, with the last 2 able to take unused parts of the personal allowance suggest that when FIRE you want to take half in gains, half in dividends. Many people here don’t like selling off stuff, but churning your portfolio is good to minimise tax. Anyone know with the FTSE total return what fraction is capital gains, and what dividends?
• 40 The Rhino March 14, 2017, 8:20 am

  @JB good point. You can’t simply consider the %s without incorporating the nil band rates for each into your thinking.

  I still maintain TI would be scary to work for . I’d be sent packing before you could say Ebenezer Scrooge (have a doctor’s apt this morning after I’ve taken my lad to school)
• 41 The Investor March 14, 2017, 10:18 am

  @The Rhino — Alas, like so many in this debate you’re forgetting that director/owners pay corporation tax on profits first, at a rate of 20%.

  You do not pay corporation tax on your salary.

  So (ignoring the Dividend Allowance and NICs for now) the two numbers you should be comparing here are basic rate income tax @ 20% VS corporation tax + dividend tax @ 27.5%.

  That overstates things by ignoring quirks; I don’t think director/owners are disadvantaged to that extent. And the situation is obviously far more complicated in the larger scheme of things (your employer pays corporation tax, for instance!)

  But given that the argument is mostly conjured up by complaints about ‘pseudo-employee’ personal service companies it’s important to compare like with like.
• 42 Neverland March 14, 2017, 10:59 am

  @Investor

  The correct comparison of salary versus dividends at basic rate tax is surely:

  Dividends: 100-20%-(80%*7.5%) = 74%, i.e. 26% tax (no national insurance)
  Salary: 100-20%-12% = 68%, i.e. 32% tax (income tax and national insurance)

  (obviously this ignores all sorts of bands for tax free dividends and NI)

  So, pay 20% less tax for being self employed, fair or not? We certainly aren’t in it together…

  …once you start to get into higher rate income tax brackets, the tax planning advantages are much more juicy

  To put the amount of tax savings of being self employed in context for high earners 3 not famous BBC presenters are on the hook for £1m in unpaid income tax because they claimed they were contractors for a decade:

  https://www.moneymarketing.co.uk/bbc-presenters-high-court-tax-battle/
• 43 John B March 14, 2017, 11:18 am

  Of course corporation tax on small companies in general has changed radically over the last 20 years. From https://en.wikipedia.org/wiki/United_Kingdom_corporation_tax#Rates there is a discussion that makes my head spin, but it seems we are still unravelling foolish decisions by Gordon Brown.

  “Chancellor Gordon Brown’s 1999 Budget introduced a 10% starting rate for profits from £0 to £10,000, effective from April 2000. Marginal relief applied meaning companies with profits of between £10,000 and £50,000 paid a rate between the starting rate and the small companies’ rate (19% in 2000).
  The 2002 Budget cut the starting rate to zero, with marginal relief applying in the same way. This caused a vast surge in incorporations, as businesses that had operated as self-employed, paying income tax on profits from just over £5000, were attracted to the corporation tax rate of 0% on income up to £10,000. Previously self-employed individuals could now distribute profits as dividend payments rather than salaries. For companies with profits under £50,000 the corporation tax rate varied between 0% and 19%. Because dividend payments come with a basic rate tax credit, provided the recipient did not earn more than the basic rate allowance, no further tax would be paid. The number of new companies being formed in 2002–2003 reached 325,900, an increase of 45% on 2001–2002.
  The fact that individuals operating in this manner could potentially pay no tax at all was felt by the government to be unfair tax avoidance, and the 2004 Budget introduced a Non-Corporate Distribution Rate. This ensured that where a company paid below the small companies’ rate (19% in 2004), dividend payments made to non-corporates (for example, individuals, trusts and personal representatives of deceased persons) would be subject to additional corporation tax, bringing the corporation tax paid up to 19%. For example, a company making £10,000 profit, and making a £6,000 dividend distribution to an individual and £4,000 to another company would pay 19% corporation tax on the £6,000. Although this measure substantially reduced the number of small businesses incorporating, the Chancellor in the 2006 Budget said tax avoidance by small businesses through incorporation was still a major issue, and scrapped the starting rate entirely.”
• 44 AAJ March 14, 2017, 1:35 pm

  The more any chancellor meddles with pensions, the more people distrust pensions. The more people distrust pensions and/or can’t invest in them, the more they will either not save or will put money into other investments. So, high earners people will diversify into property and poorer people will save less. The more money wealthy people put into property the higher the property prices and the less poorer people save into their pensions. Eventually you *need* to start changing pensions on a bi annual basis just to adjust to the events that you have created from the previous change.

  I’ll put some money into a pension, but I don’t know what the pension will look like in 20 years time. I shall also put some money into property. I can visualise what that will look like to 20 years time, which is exactly what it looks like now, but worth more.
• 45 Richard March 14, 2017, 3:43 pm

  Wouldn’t all these company directors be taking salary if taking dividends was at a disadvantage? But all those I know take dividends even with the dividend tax as it is still better. Plus corporation tax is due to go down making it better again.
• 46 The Investor March 14, 2017, 4:14 pm

  @Richard — I was simply pointing out to @TheRhino that *his* bare numbers were (effectively, for personal service companies) missing 20% tax take! But as I said, I don’t think they are disadvantaged to the extent such a simple comparison would suggest. (Fact is you can’t look at it without looking at all the other parts). You can probably compare one bit of any of the regime with one bit of another (tax, NICs, risks, expenses, differences in statutory rights, benefit to the economy etc) and come up with whatever conclusion you want. This is why I’d favour a thorough overhaul if we’re set on meddling with all this. Ironically, as I noted in the piece, they are doing the review. They just seem to want to make the changes ahead of it! 🙁
• 47 Richard March 14, 2017, 4:32 pm

  very true. I remember some comments on an article where it was demonstrated that it was possible to get more than 100% pre tax income post tax by mixing a number of approaches – although I think it was a specific case and relied on pensions.
• 48 John B March 14, 2017, 5:51 pm

  @Richard if you earn £10k and put £8k in a pension, you get the £2k tax relief even though you never paid the tax, it being under your personal allowance.
• 49 Richard March 14, 2017, 7:24 pm

  @john b – I think the scenario I was referring to involved employer NI as part of a salary sacrifice scheme to take home more than you earned (without putting you completely on the poverty line….)
  Your example also has the same effect – good for the wealthy dividend earner who earns limited income!
• 50 John B March 14, 2017, 7:48 pm

  @Richard I did that one too!
• 51 The Rhino March 15, 2017, 12:31 pm

  Me too – net pay > gross pay at the moment, long may it continue?
• 52 The Investor March 15, 2017, 4:22 pm

  It seems this Lady is for turning*:

  Plans to increase National Insurance levels for self-employed people – announced in the Budget last week – have been dropped.

  Chancellor Philip Hammond has said the government will not proceed with the increases which were criticised for breaking a 2015 manifesto pledge.

  He told MPs in a Commons statement: “There will be no increases in National Insurance rates in this Parliament.”

  http://www.bbc.co.uk/news/uk-politics-39278968

  So I’m glad they’ve reversed on the NIC hike for the self-employed… but “no changes”…?!

  Again, I have to wonder even more now what that poor bloke who is doing the wide-ranging review on employment taxation and so forth thinks he up to?

  First they were making changes before his review, now they’re ruling out changes after his review?

  Perhaps he’s just holed up with a Nintendo Switch and a copy of the new Zelda game?

  No change to the similarly ill-advised dividend tax allowance cut, as far as I can tell, sadly.

  (*Reference, for the kids: https://en.wikipedia.org/wiki/The_lady's_not_for_turning)
• 53 The Rhino March 16, 2017, 11:24 am

  Well its all a bit of a merry-go-round isn’t it. What a joke??
• 54 David March 16, 2017, 8:38 pm

  @ The Investor regarding jaw dropping redundancy payments

  Many companies in fact pay the statutory minimum, which is very little indeed. Specifically it’s no entitlement to any redundancy at all until you have 2 years service., and after that:
  – half a week’s pay for each full year you were under 22
  – one week’s pay for each full year you were 22 or older, but under 41
  – one and half week’s pay for each full year you were 41 or older

  But for higher earners it’s not based on your actual salary, as the weekly pay amount is capped at £479. And length of service is capped at 20 years.

  So a 40 year old with just under 5 years service will only get £1,916 if they earn any salary above £25,000 (which is roughly the national average wage) or less if they have a lower salary or perhaps work part time.

  Many companies will also make you work your notice period, so you won’t get PILON (payment in lieu of notice) either. And from April 2018 all PILON will be fully taxable as earnings as well.
• 55 The Investor March 16, 2017, 9:08 pm

  @David — Thanks for that information.

  I guess it’s the circles of privilege I move in… I have multiple friends who have enjoyed (or were offered for voluntary redundancy that they didn’t take) decent five-figure sums. One has done it twice! I’m talking in the bigger cases “take a paid year off” money. To be fair most of these people were well-paid with good employers, on London money, and in the lower paid case they had quite a few years of service.

  I’m quite prepared to believe that isn’t the norm for the average employee, which your figures would confirm. But then to the point of this discussion, the average self-employed/ltd company director isn’t a tax-dodging high earner, either, going on the average income for self-employed surveys. (Just £240 a week and well below the £400 earned by employees, according to this article in the Independent).

  I can see though that the statutory terms are more important in the context of the NIC debate, so cheers again.