Contractor dividends won’t be affected by the Chancellor George Osborne’s plans to align income tax and National Insurance Contributions (NICs) announced in the Summer Budget 2015.
The Office of Tax Simplification (OTS), which has been tasked with “a simplification review into the closer alignment of income tax and national insurance”, has confirmed in its Terms of Reference that: “The review…will not consider the extension of NICs to non-employment income (such as property, dividends and pensions).”
According to the OTS: “The main aim of the project is to explore more fully the steps that would need to be taken to achieve closer alignment of income tax and National Insurance contributions, and the costs, benefits and impacts of each of those steps.”
However, the OTS concludes its Terms of Reference by adding: “Closer alignment [of income tax and NICs] was seen…as the main indirect way of ‘solving’ employment status problems.”
ContractorCalculator CEO Dave Chaplin highlights that whatever the outcome of the OTS report, a single earnings tax preferred by the Chancellor remains unlikely: “If income tax and NICs were to be merged, employees would discover exactly how much tax they actually pay. That would mean political suicide for the government that introduced such a tax.
“And let’s be honest, NICs are just another income tax and tax on jobs, so why are we still pretending that these contributions are purely funding our pensions and healthcare?”
Chaplin also believes that the shake-up is designed to extract more tax from small businesses, such as contractors, and the self-employed:
“Although the Chancellor introduced the new Dividend Tax in the Summer Budget to tackle perceived tax avoidance by business owners, under the current regime small business owners are still able to pay lower NICs than employees.
“The ultimate objective of this exercise is once again to punish successful entrepreneurs and family-owned businesses by generating more tax in such a way that the government does not break its pre-election promises to freeze income tax, NICs and VAT.
The OTS project to review closer alignment of income tax and NICs is due to report to the Chancellor ahead of the Budget 2016 in March next year. Contractors and contracting stakeholders can make their views known by contacting the OTS at ots@ots.gsi.gov.uk.