Why are contractors being targeted over dividends?
The recent news that there will be changes to the way dividends can be used in order to make businesses more tax efficient has cause some consternation amongst those who have been operating through limited companies. As one of the allowed tax efficiencies, many contractors relied on the use of dividends to maximise their income, but this practice was not limited to limited company contractors and is widely used amongst a range of UK companies as part of remuneration packages for shareholders and directors.
The research which shows this was the Profit Distribution and Investment Patterns of Unlisted Companies study which was conducted by the Ipsos MORI on behalf of HM Revenue and Customs. The findings have prompted questions as to why contractors have been targeted by the department when it comes to using low salary/high dividend pay schemes when they are by no means the only users of such methods to maximise their incomes.
The report surveyed over 1,500 companies and found that contractors were set to be hit much harder by the changes to dividend tax which are due to be introduced in April 2016. The disparity in the way that contractors and businesses will be treated adds fuel to the concerns of industry bodies who believe that contractors are being targetted as though their legitimate attempts to make the most of the tax efficiencies available to them are in some way cheating the system.
With the companies surveyed making up a significant proportion of the UK’s GDP and employment, not to mention the fact that encouraging entrepreneurship is a good way to stimulate the economy in a number of different sectors, the government should be keen to avoid discouraging start-ups.
The value of the contracting sector should not be underestimated by the government when making policy decisions, but whether HMRC will take heed of this survey that they commissioned, only time will tell.
If you want to know more about how best to organise your finances as a contractor, then our guide to the advantages and disadvantages of a limited company could help you understand your position. We also have handy guides to contractor tax and contractor expenses which will help you to get a broader understanding of the financial implications of contracting.
For detailed advice on how to make the most of your contracting income, including up to date information on any changes that could affect you, call our friendly team of experts on 01442 275789 or email firstname.lastname@example.org.