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.
“To be in that position, you’d have to have a portfolio of over £50,000 if it was yielding 4 per cent a year,” Suter said.
Despite being less impacted, Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the PM’s announcement was a “kick in the teeth for investors”.
She continued: “Investors have had to crawl through a horrible dividend drought during Covid-19, and were just getting back on their feet, so this will feel like a particularly nasty attack on their income.
“Given that so many of them will also have a higher NI bill, it deals them a double blow at a difficult time.”
But some investors and a portion of the self-employed won’t lose out from the levy, namely landlords, unless they have incorporated their business and pay themselves dividends.
“Buy-to-let landlords escape for once,” said Tim Stovold, head of tax at Moore Kingston Smith.
“By limiting the NI increases to earned income and the equivalent on dividends, rental income has escaped unscathed.
“Although there are already limitations for landlords on deductions for mortgage interest and the additional 3 per cent stamp duty land tax charge for second properties, there is no additional attack today on their rental profits.”
But those landlords who chose to incorporate their BTL portfolios into a company will be caught out, Stovold added.
This is because their rental income becomes a dividend.
GetGround, a fintech start-up in the BTL space, landed funding back in June to do just that - help landlords turn their portfolios into companies.
‘Car crash’ on the detail
Many criticised the PM’s scarcity on the details, leaving advisers asking more questions around how the levy will apply to pension-age workers and how local authorities will deal with the “administrative nightmare” that is tracking social care costs.
The government has promised a cap on the cost paid by any one person for social care in their lifetime, which will be set at £86,000 for people entering care from October 2023. There will be a floor of £100,000 in assets.
This means the government will foot the bill for those whose social care exceeds £86,000 in later life.
But Martin Bamford, head of client education at Informed Choice, called the policy announcement “an utter car crash”, with “much detail remaining unclear”.
He continued: “Johnson hinted that pensioners would shoulder some of the cost but it wasn't clear whether he was referring to National Insurance contributions past state pension age, or older people paying a higher dividend tax. I strongly suspect the latter.”
He reckons the £86,000 lifetime cap was an “attractive headline”, but that in practice “relatively few people benefit”.
Bamford dubbed the levy “an administrative nightmare for local authorities”, who he believes “lack the resources to assess people by October 2023”.
He concluded: “The tapered local authority support between £20,000 and £100,000 in England will also be ridiculously complicated for families to calculate or understand.”
The levy won’t just help those in England. It will also contribute £2.2bn a year to Scotland, Wales and Northern Ireland.
That’s 15 per more than these countries will contribute, Johnson said, which he said will create a union dividend worth £300m.
ruby.hinchliffe@ft.com
