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Owners of small companies would pay more tax under Labour – up to 45% more – but the Tories haven’t mentioned this.
Commenting on the Labour manifesto, John McDonnell said “In terms of income tax, the top 5% will pay a bit more, and actually not a great deal more. 95% of earners will not pay more in income tax rates, VAT or national insurance.” Click here
He said some people have told him they would be proud to pay more tax.
You can watch him say there would be no increase in income tax rates for those below £80,000: Click here
So if you earn less than £80,000, you won’t pay more tax, right? Not necessarily. What McDonnell was ignorant of, or lied about, is that dividends are subject to income tax, and he firmly proposes to increase the rates of tax on those.
So if you own a small company and take its earnings as dividends, you will pay up to 45% more tax, even if your share of the pre-tax profit is below £80,000.
This is not just because he would increase the rate of corporation tax from 19% to 21% by 2022/23. The main reason is that he proposes to tax dividends on the same basis as salaries and wages. So he would abolish the £2,000 tax-free dividend allowance, and apply tax at 20% to the basic rate tranche instead of 7.5%. He would also increase the rates for the higher rate and additional rate tranches.
This would affect everyone who receives a dividend of course, but it would particularly affect the owners of small companies, who take much of their companies’ earnings in the form of dividends. They are advised to pay themselves a salary of only £8,632, because National Insurance contributions of 25.8% would be incurred on anything above that figure (a combination of employee and employer contributions). The profit is subject to corporation tax, then the after-tax amount can be paid out as a dividend.
It is estimated that there are almost 2 million small companies in the UK.
Property 118 member Ros Beck drew McDonnell’s misleading claim to the attention of the Telegraph, newspaper which published an article on 30 November about it. Click here
Unfortunately, the people at the Telegraph who did the calculations for that article forgot to take account of corporation tax so their results were overstated by about £3,000.
Even so, it is bizarre that none of the Tory spokesmen have exposed the fact that the owners of small companies would pay more tax under Labour than they do now, and that some would pay almost half as much again. It reminds me of the story about the dog that did not bark in the night because the thief was its master. Why are the Tories not making a noise about this? Do they assume that no owners of small companies vote Labour?
Dr Beck has managed to get CapX to cover the story again today, including a table with accurate figures: Click here
It does not show the percentage of net income that would be confiscated by McDonnell. This is shown in the complete table below:
Taxation of a one-person company in 2022/2023 under Labour’s proposals compared to today.
A salary of £8,632 has been assumed in each case.
Self-employed people operating as limited companies that make between £60,000 and £80,000 profit would lose 12% of their net income – almost one-eighth. Would that make you feel proud? Or does it make you want to ask your Tory candidate why they are not publicising this?
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