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Comment by petesergeant | Hacker News Reader

It's not a difference in rate between employment and self-employment, though, and that's really the core of the issue. If you're self-employed your tax rates are (virtually) identical to those who are employed. If you set up a company and pay yourself a salary from that company, those tax rates are also virtually identical (although now you're having to pay employer NI contributions).

What's different is the tax rate on dividends from shares, and the tax on employment, and that's the tax loophole that IR35 seeks to close.

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As an employee earning £50k a year I would pay £12224 tax and NI, as a self employed person I would pay £11303 tax and NI. If I'm working for my own ltd I will pay £10871 as a combination of personal tax and corporation tax. The difference is not enormous. I think the IR35 stuff was to stop employers avoiding their NI contributions which is an extra £6155 tax on the £50k salary.

When IR35 was first introduced dividends weren't taxed the same way and it really was a big tax advantage to work through a Ltd. That was arguably a reasonable situation if you really were running your own business with your own costs and risks as well. However it was definitely exploitable by people whose clients were really employers offering them the same perks as permanent employees anyway.

But that hasn't been the situation for quite a few years now so the financial arguments to "justify" IR35 don't really make much sense any more.

About 5 years ago, the BBC started clamping down on star presenters who were employed through private companies. Previously they were encouraging it; if you asked for a pay rise, they'd suggest you'd be better off setting up a company.

Basically it works out £6000-12000 cheaper to employ a contractor for a business which results in higher rates (some of that money ends up in the pockets of contractors). The actual IR35 changes (that are repealed) meant the contractor pays that £6-12k which makes “inside” contracts ~12% less valuable. I think despite the small reduction in tax the idea I’m paying both employers and employees NI is quite frankly taking the piss and I refuse to do it.

Personally I think all tax breaks businesses get should be available to individuals; corporations have long campaigned for the rights of the individual like liable and so on with a fraction of the tax burden, surely it should be available the other way around. Particularly when it comes to paying any tax if you haven’t earned enough to feed and house yourself.

>Particularly when i>t comes to paying any tax if you haven’t earned enough to feed and house yourself.

Looking at it another way: companies pay tax on profits, we pay it on revenue.

That's not how it's been used:

You set up an umbrella company with yourself as a shareholder

You pay yourself minimum wage, thus paying little income tax and national insurance

You then pay yourself and any other shareholders a dividend based on profits but this is taxed at a much lower rate than employee income and without national insurance

Advanced players set up their umbrella company in another country where the company taxes are even lower

As far as I can tell, employing yourself via a limited company being cheaper is no longer true, contrary to what the turnkey company industry would like you to believe. With the higher rate for dividend tax being 33.75%, dividends that lead to a total income over 37700 are taxed at ~47% (dividend tax+corporation tax).

What's wrong with that?

Your numbers don’t sound correct. Are you including the employers side of national insurance?

But when IR35 was introduced the dividends weren't really taxed at all. In fact there were even some tax credits related to dividends for a while. Today the situation is completely different and the tax rates on dividends are not far off NI levels at lower income levels and much worse higher up (because employee NI drops to a very low rate once you're a higher rate tax payer but dividend taxes are uncapped).

Once you factor in things like the contractor's Ltd paying for its own running costs, time off for things like holidays or sickness, and pension contributions it makes very little sense for someone to go the Ltd route instead of being an employee just for tax/financial reasons now. The real advantages are in flexibility and having a real business-to-business relationship with clients, which can break various glass ceilings you might otherwise hit as an employee.

Low dividend taxes were supposed to ensure that richer, business owners who provided political donations were taxed less than the people who worked for them. The "loophole" is that workers figured out a way to get that white glove capitalist treatment.

In the process of trying to "close the loophole" and codify the distinction between "good upstanding capitalist" versus a "dirty little employee" they kind of underscored the fact that economically identical activity is being taxed differently according to your position in the British class hierarchy.

It reminds me a bit of dekulakization - the idiotic Soviet reforms that took the opposite tack and attempted to crack down on "dirty little capitalists" by deporting farmers to siberia because e.g. they owned a sewing machine and two pigs.

> those tax rates are also virtually identical (although now you're having to pay employer NI contributions).

Employer NI is 14% on top, it’s a big increase tax wise. It brings the effective tax rate for FAANG/similar salaries to over 58%.

For those unfamiliar, listentothetaxman [1] is a great resource.

1. https://listentotaxman.com/

> What's different is the tax rate on dividends from shares, and the tax on employment, and that's the tax loophole that IR35 seeks to close

The dividend tax makes up for this

What's different is the dividends escape employers National Insurance contributions

True, though I'm not sure they "escape" NICs so much as not being relevant. No NICs on capital gains or lottery winnings either.

As an aside, I think they should scrap NICs and transparently collect it all through a single, higher income tax, but I guess it's handy to trick basic rate tax payers into paying 45% marginally (income tax, plus employee and employer NICs) by breaking it all into pieces..

> income tax, plus employee and employer NICs

The other tax that individuals get hit by, that megacorps get to avoid, is VAT. Sure, megacorps pay VAT on their inputs; but they claim them back on their outputs. Individuals spend most of their residual income, so that gets taxed at whatever (20% now?). So individuals end up paying something like 70% tax.

VAT is a wicked tax.

[Edited] 20%, not 25%.

UK VAT is 20% on most of the items it applies to

Most contractors are in a position to claim it back if they're also charging it

Only claim it back on company expenses.

I think what the parent is referring to is that individuals get taxed twice - once when they acquire the money (whether NI via employment, or dividend tax via limited-company self-employment) and then a second time when they spend it because most of what they spend it on includes VAT.

That's exactly what I meant; except that although you mentioned NI, you didn't mention income tax. Dividend is irrelevant - I was referring to individual employees (sorry - didn't make that clear).

The government (doesn't matter which colour, they're the same) make a huge deal about income tax rates, tax-free thresholds and so on. Income tax is a smaller part of my tax outgoings than VAT, by a long chalk. (Well, it was when I was earning; now I'm retired, I don't earn income, and nearly all my taxes are VAT).

While VAT is highly regressive, this does not make sense. Most people spend only a tiny proportion of their income on things subject to VAT.

E.g. for starters, the 20% VAT can only at most apply to what you haven't already paid in tax, so in the event of your hypothetical 50% effective tax rate including employers NI as a contractor (which means you'd need to be making around 110k GBP, placing you in the top 2% or so), you're at most spending 50% of your income, in which case VAT will at most add up to an additional 10% tax on your gross income.

But in reality, most peoples biggest expensive will be things like mortgage payments or rent, neither of which you pay VAT on, and other major expenses such as a lot of food products, are also VAT exempt.

Last time I did the maths for myself, VAT added up to 4% of my gross salary.

Agree PAYE and NI should be merged – the distinction between earned and unearned income in the UK benefits those with capital rather than people who actually work

To me dividends escape employers NI in the sense that if they were paid as salary then they'd attract employers NI and contractors can choose whether to take income as salary or dividends

As a contractor I've always disagreed with the argument that "it's unfair that contractors pay employers NI" and think many contractors see their company's income as their personal income when it's not

The PAYE/NI distinction is really because it's wildly politically inconvenient to admit that the difference between the lower and higher tax band is effectively much smaller than most people think it is. Merging them would create a lot of political pressure to widen the difference.

But other small businesses get quite a generous allowance before they start paying employers NI as well now. There's yet another special case in the tax rules that hits solo companies specifically by saying they can't claim the same allowance as everyone else.

It's not different if the client hires a big consultancy firm though, but HMRC has no problem with these for some (khem... khem..) reason...

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