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Dividends should be unaffected by tax and NI merger

When the Chancellor made his Summer Budget announcement, there were plenty of people concerned about the impact that his plans would have on the contractor workforce. The changes in the way travel and subsistence expenses could be claimed, the increases in dividend taxes and the proposals to tighten up the IR35 legislation were all highlighted […]

By Laura Nixon on 30 Jul 2015
Read time: 2 minutes

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When the Chancellor made his Summer Budget announcement, there were plenty of people concerned about the impact that his plans would have on the contractor workforce. The changes in the way travel and subsistence expenses could be claimed, the increases in dividend taxes and the proposals to tighten up the IR35 legislation were all highlighted in the aftermath of the announcement, especially by those concerned that they would have a negative effect.

However, the news that income tax and National Insurance were to be merged drew less attention, but the Office for Tax Simplification has been given the task of reviewing the process to ensure that it is not an irredeemably onerous one. In their view, confirmed by their Terms of Reference, there is no need to extend National Insurance Contributions to any income which is not generated by employment i.e property, dividends and pensions.

The aim of the OTS’s project is to establish what would be needed to align income tax and National Insurance Contributions more closely, as well as working out the various steps involved, the possible drawbacks and the benefits. One of the main reasons to consider combining the two would be the indirect benefit of a potential ‘solution’ to the problem of employment status confusion.

There are concerns that, no matter what the OTS recommends, the Chancellor will never realise his ambition of creating a single tax on earnings. The more cynical believe that employees being confronted by the reality of how much tax they are paying could be bad for any government that introduces it. The existence of the various different forms of taxation has traditionally been used as a way of allocating funds for various purposes, such as pensions and health care, whereas the reality may not be quite as clear-cut as it might appear.

Although the OTS has been clear that there are no plans to increase the level of tax paid on income which is currently being taxed through other means, this does not mean that any merger between National Insurance and income tax will leave contractors unscathed. The government’s pre-election promises to freeze income tax, VAT and National Insurance contributions leaves them with few sources of additional revenue, and there are those who believe that targeting contractors, small business owners and other self-employed individuals will be the target of any revenue-raising measures to be introduced.

Anyone who wants to know how the proposed plans for contractor tax and expenses will affect them should consult a specialist contractor accountant. With years of combined experience, our team are knowledgeable and friendly and can talk you through any aspect of your finances, from setting up to expansion and retirement and anything else. For details of our low-cost packages, designed to save contractors time and money, call us today on 01253 362062 or email us at contractoradvice@nixonwilliams.com.

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