With the tax differential between limited company owners and traditional workers substantially reduced due to successive dividend tax hikes, why don’t policy makers take into account the extra costs contractors have to bear compared to employees? Policy makers don’t understand how ‘contracting’ works
In recent years, Government tax policy has been increasingly focused on what it currently refers to as ‘tax-motivated incorporation’, based on the suspicion that large numbers of individuals incorporate purely to pay less tax on their earnings.
The tax hike in April 2016 was the perfect example of this – an indiscriminate tax increase, which affects all company owners, regardless of their motivations, or industries they work in. And, just to make sure, the Government has already meddled with the new dividend tax rules and announced a cut in the dividend allowance from £5,000 to £2,000 from April 2018.
This Budget 2017 announcement will cost a typical contractor between £250 and £1000 extra per year, on top of the existing 2016 dividend tax hike (which in itself will cost the average contractor several thousands per year).
What infuriates so many within the contracting industry, is the approach policy makers have towards those who work on their own account – and the “outrage” shown by some newspapers in recent years, who claim that limited company professionals are ‘tax dodgers’, or ‘pay just 20% tax on their earnings’.
Those who frequently criticise the use of so-called ‘personal service companies’ forget:
a) Limited company owners pay 20% Corporation Tax on their turnover, but also personal tax on any dividends and salary they draw down.
b) Almost all professional contractors are oblige to work via intermediaries – it is hardly a ‘choice’.
c) A typical limited company contractor will earn more, and have a lower tax percentage than a PAYE employee. But at the same time, contractors have no ‘perks’ of the job, and less job security than employees.
Here are some of the things professional limited company workers have to pay for, which ’employees’ take for granted.
Typical costs a limited company professional has to bear
Professional Indemnity Insurance
Other Insurances (e.g. Public / Employees’ Liability).