National Insurance and Dividend Tax Inequality

National Insurance and Dividend Tax Inequality

7:00 AM, 27th October 2024, About 2 weeks ago 3

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The History of Dividend Tax Increases: George Osborne’s 2016 Budget and NIC Justification

In the March 2016 Budget, George Osborne introduced significant changes to the taxation of dividends. The reasoning? The government argued that salaried and self-employed individuals paid NICs on their earnings, while dividends were not subject to NICs, creating an unfair advantage for those incorporating businesses and drawing income through dividends.

To address this, the government:

  • Introduced a new dividend tax allowance of £5,000 (now reduced to £500 in the 2024/25 tax year),
  • Raised dividend tax rates to:
    • 7.5% at the basic rate,
    • 32.5% at the higher rate,
    • 38.1% at the additional rate.

The aim was to level the playing field between those receiving earned income, which is subject to NICs, and those receiving dividend income, which was not.

But here’s the problem: while this change was meant to target those avoiding NICs by paying themselves dividends, landlords—whose rental income was never subject to NICs—were swept up in the reforms. Now, landlords who run their property businesses through Limited Companies are subject to higher dividend tax rates, despite never benefiting from the NIC-related tax loopholes the policy was designed to address.


How NIC and Dividend Tax Inequality Affects Landlords

For landlords running their property businesses through Limited Companies, the problem is clear: they pay the same dividend tax rates as active trading businesses, yet their income isn’t subject to NICs and never was. This creates an imbalance where landlords are paying more on their dividend income, despite not benefiting from the NIC savings the policy was meant to address.

For the 2024/25 tax year, the dividend tax rates are:

  • 8.75% at the basic rate,
  • 33.75% at the higher rate,
  • 39.35% at the additional rate.

Landlords who have incorporated their portfolios and pay themselves through dividends are hit with these rates, even though they are effectively paying for a NIC-related tax gap that was never applicable to them.


Worked Example: The Landlord Hit by Dividend Tax

The Situation Pre-Dividend Tax Increase:

Before the 2016 reforms, landlords paying themselves dividends benefited from the £5,000 dividend allowance, which reduced their tax liability significantly. Under that system, a landlord paying themselves £30,000 in dividends would have seen a much smaller tax bill, particularly at the basic rate.

After the 2016 Reforms and Today (2024/25 Tax Year):

As of the 2024/25 tax year, the dividend allowance has been reduced to just £500, meaning landlords must pay tax on nearly all of their dividend income. For a landlord paying themselves £30,000 in dividends, the tax looks like this:

  • £500 is exempt.
  • £29,500 is taxed at 8.75% (basic rate).

So, the total dividend tax would be:

  • £29,500 x 8.75% = £2,581.25 in dividend tax.

This increase was originally justified on the grounds that self-employed individuals and employees pay NICs on their earnings, while dividends were NIC-free. However, landlords—who never paid NICs on rental income—are now facing this increased dividend tax rate without any offsetting benefit.


The Inequity Is Clear

The key issue here is that the dividend tax increase was designed to reduce the advantage that incorporating businesses had over self-employed individuals, who pay Class 4 NICs on their profits. The government wanted to ensure that those drawing dividends were paying a similar tax burden to those receiving income via salaries. But landlords, whose income is passive and was never subject to NICs, are now paying more in tax because of a policy that was never meant for them.

This inconsistency means landlords are paying the same dividend tax rates as trading businesses but without ever having benefited from NIC savings in the first place.


Why This Inequity Matters

The current system leaves landlords at a disadvantage because:

  1. No NIC Contributions: Since rental income is classified as passive, landlords are denied the opportunity to contribute towards NIC credits, which help with state pension entitlements and other benefits.
  2. Same Dividend Tax as Active Businesses: Landlords are now paying the same high dividend tax rates as businesses drawing dividends from trading income, even though the policy rationale behind these increases was to offset NIC advantages that landlords never had.

This leaves landlords paying more tax on their income without benefiting from the policy changes that were meant to close gaps for trading businesses.


Time for Fairer Tax Treatment

The government needs to address this inconsistency. If rental income is going to be taxed at the same rate as trading income through dividend tax, landlords should be entitled to the same NIC credits that business owners receive for their trading profits. Alternatively, landlords should see reduced tax burdens to reflect the passive nature of rental income, including lower dividend tax rates for incorporated landlords.

As we approach the 2024/25 Budget, it’s time to push for fairer tax treatment for landlords. By recognising the inconsistent treatment of rental income for NIC and dividend tax purposes, we can help ensure that landlords are treated equitably in the tax system.

 Let’s End the Inequity

The inconsistency in how rental income is treated for NICs and dividend tax highlights yet another way landlords are unfairly taxed. It’s time to ensure that landlords receive the same tax benefits as other business owners or, at the very least, reduce their tax burden to reflect the passive nature of their income. Let’s push for fairer tax treatment and end the inequality that is hurting landlords across the UK.

Support Property118: Fighting for Fairer Tax Treatment

At Property118, we are campaigning for landlords to receive the same fair tax treatment as other businesses. Whether it’s addressing the National Insurance inequality or the high dividend tax rates, we’re pushing for changes that will benefit landlords and ensure they aren’t unfairly penalised by the tax system.

If you believe in tax fairness for landlords, consider supporting our efforts.

Every donation counts. Use the form below to help us fight for a fairer tax system for landlords across the UK.

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PAUL BARTLETT

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20:07 PM, 27th October 2024, About 2 weeks ago

"the passive nature of rental income"
Is a Treasury fiction as the reality is that we actively work for letting revenues according to the legal responsibility of company officers and of landlords.
Isn't it a requirement of a commercial business to take at least three days work per week so Active not Passive?

Rob Thomas

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13:39 PM, 28th October 2024, About 2 weeks ago

Hi Mark

I think the situation is worse than this because you haven't mentioned the corporation tax payable on rental profits in a company.

Consider someone who is a higher rate taxpayer from their salary but also has an unmortgaged rental property. Each £100 of profit from the property would be taxed at 40% if it's in their own name. But if it's in a company, the tax would be 19% corporation tax plus 33.75% tax on dividends received. So if the whole profit was distributed as dividends the effective tax rate would be 46.3%.

Calculation:
£100 rental profit
£19 corporation tax (19% rate on profits of under £50,000)
£81 dividend paid taxed at 33.75%
leaving £53.7 post tax income (46.3% total tax rate).

GlanACC

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8:14 AM, 31st October 2024, About A week ago

I am not too concerned by the dividend rate as it is still less than normal income tax and it is still the best way of getting money out of your LTD Company.

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