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Tax on dividends

Comment 6th July 2010

One anomaly created by the policies of the last government has given rise to an unintended consequence.
 
Those running their own business are able to form a company into which their earnings are diverted. Their remuneration is then arranged so that they are paid by way of a salary and dividends.
 
The salary is typically pitched at a level where they pay a nominal amount of national insurance (both employees' and employers') and so are eligible for state benefits available including an element of S2P (assuming they are contracted in). Because of current thresholds this is unlikely to incur any income tax per se though clearly this would depend on the amount paid as salary.
 
The balance of their remuneration is paid as a dividend attracting 10% tax at source which is borne by the company. Provided the overall level of money extracted from the company is kept below the 40% threshold, they can expect to pay half the amount of tax that a normal employee would pay on a similar amount of income. This is because they effectively pay 10% on income up to the higher rate threshold rather than 20%.
 
This can be duplicated for married couples where the circumstances can be manipulated to fit the fiscal corset.
 
The simple answer would be to raise the witholding rate to the same level as the basic rate of tax – ie 20%.
 
So as to avoid disadvantaging pension funds and ISA investors, the excess over the current  witholding tax of 10% (or whatever level is chosen)could be reclaimed within pension and ISA funds.

Why does this matter?

To ensure a fairer distribution of the burden of tax .


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