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Company directors hit by 'double whammy' in social care reform

Company directors hit by 'double whammy' in social care reform

The prime minister's ‘health and social care levy’ will have a “huge knock-on effect” for the nation's entrepreneurial spirit, experts have warned.

Yesterday (7 September), Boris Johnson confirmed a 1.25 per cent hike in National Insurance alongside a further 1.25 per cent dividend tax to fund the government's social care reform plans.

He argued in the House of Commons that the two-pronged tax increase would ensure businesses as well as individuals paid for the reforms, which together will raise £36bn over the next three years.

But many experts have highlighted the “wider ramifications” this levy will have on the self-employed in particular.

“There are hundreds of thousands of directors of limited companies who pay themselves an income through dividends,” said Shaun Moore, tax and financial planning expert at Quilter.

“This is a group that was locked out of any financial support during the pandemic and is now facing the double whammy of seeing their income hit just as the recovery takes shape and they try to find their feet once again.

“This policy has wider ramifications and could have a huge knock-on effect on the entrepreneurial spirit of the nation.”

AJ Bell has calculated the new levy will cost the self-employed and investors a collective £600m.

Though the firm added rises will “likely” hit company directors “more than retail investors”, who top up their salaries in dividends.

Laura Suter, head of personal finance at AJ Bell, said the dividend tax hike looked “very much like a last-minute policy addition” positioned to “spread the pain” of tax increases across society. 

“The move means that anyone taking home more than £2,000 a year in dividends will now face a slightly higher bill,” said Suter.

On a £10,000 dividend intake, the hike equates to £100 a year more regardless of a business owner’s tax bracket.

'Clever' move

Carl Roberts, managing director at RTS Financial Planning, told FTAdviser: “The increased tax on dividends will probably catch a lot of people by surprise as all the talk was on raising NI only.”

He added: “The government has been clever here in making sure they catch business owners who currently pay little in the way of NI by taking the majority of earnings as dividends.”

Roberts said the levy will make it harder for smaller businesses to recruit, and that it was essentially a tax on jobs. 

“There is now a significant increase in overall costs of employing staff on top of the employee’s salary,” the chartered financial planner explained. 

“Employer’s NI and compulsory employer pension contributions, it all adds up.

“The only real solution I see at present for employees and business owners is to maximise their own pension contributions and to do this via salary sacrifice in order to save income tax and NI.

‘Kick in the teeth’ for most, but not all

For retail investors to be affected by the tax rise, their annual dividends would need to be above £2,000.