Limited company contractors trying to work out how much to pay themselves and the tax liability on that payment must resort either to asking their accountant to do the sums, or turn to online calculators and guides, such as those found on ContractorCalculator.
Surely the tax code should be simple enough so that company owners can work out their dividend and tax liability without seeking expert assistance? What has happened to the Office of Tax Simplification (OTS) and its aims to simplify the UK's horrendously complex tax manuals? The office has been fairly quiet of late, and initiatives it does propose don't seem to be having much simplifying impact.
The dividend tax credit is a classic example of how our tax code has gone wrong, by overcomplicating what should be a simple process. A company makes profits that can be dispersed to the shareholders, and quite rightly the shareholders should pay income tax on those profits.
But why then does there need to be a horribly complicated calculation that involves no tax on the basic rate allowance of £31,865 (correct at the time of writing) and then 40% on amounts higher than that? And, just to confuse things, that's after grossing up the dividend by 10/9 to account for the dividend tax credit.
Even then the marginal rates, or the highest rate of tax a contractor pays, start at 32.50% for higher rate taxpayers rising to 37.50% for top rate taxpayers, resulting in gross rates of 22.50% and 27.50% respectively. These bear no resemblance to the more familiar 20%, 40% and 45% that employees pay on their salaries.
Are you lost yet? I know I am.
The OTS was formed to meet a very real and increasingly desperate need to cut the amount of tax legislation and make it more accessible for mere mortals – not just accountants, tax advisers and tax barristers.
Ideally, limited company contractors should be able to apply a straightforward calculation to work out how much income tax they should be setting aside each month as they pay themselves a minimal salary and the balance of their remuneration as dividends from profit.
But every year Chancellors of all political persuasions, and their civil servant colleagues in HM Treasury and HMRC, delight in adding yet further legislation to the tax code. IR35 is a classic example of adding complexity without adding value, as the Lords' inquiry into the use of personal service companies (PSCs) demonstrated.
Unfortunately, based on past experience, the abolition of IR35 or the merger of income tax and National Insurance Contributions (NICs) are looking as inaccessible as ever. Will whichever new government is formed a year from now grasp the complex nettle of taxation and genuinely support the simplification agenda?