Chas Roy-Chowdhury, the head of tax at the ACCA is an old sparring partner of mine. The fact that he thinks I'm a far left socialist says a lot more about Chas and where he's coming from than it says about me.

Chas also has a slight problemn for someone holding his position: he seems to be a little short on the knowldege front on how the UK tax system works. He wrote an article on Friday for the BBC in which he says that if a person is paid dividends from a company they own they will pay more income tax as a result than they would pay if they were taxed as an employee on the same sum and paid NIC on it.

Unfortunately, Chas got just about all his numbers wrong. First of all, he claimed the tax due on £200,000 of income subject to PAYE would be £84,653. Unfortunately that's wrong. The real figure, (£34,370 @ 20%, £115,630 @ 40% and £50,000 at 50%) is £85,463. OK, just a transposition error out, but wrong all the same.

Then, rather more seriously, he shows he has no idea at all how dividends are taxed. His claim is that if a dividend of £200,000 is paid that first corporation tax of £40,000 is paid and the remaning £160,000 is then taxed at 32.5% and 42.5%. Oh dear Chas: time to do some homework. He ignores the fact that the recipient still has a basic rate tax allowance of £34,370. And it's also a fact Chas that the £40,000 tax paid on the £200,000 is not a tax at 100% leaving £160,000 left over to be taxed at remaining rates: it's a credit of £40,000 available to the tax payer to be offset against the total sum due on income which still is £200,000.

The result is that the tax due on £200,000 of dividend is £85,463. You can calculate the way I did above or you can use the much more complicated dividend method but the result is always the same: the tax on £200,000 of earned income is the same as the tax on £200,000 of dividend income.

What did Chas get wrong? Candidly, I'm not sure: nothing I can do can make a tax bill as high as he creates. It's a guaranteed fail for sure.

And as for whether the person in the personal service company is better off or not, well, Chas says they aren't because he can't do his numbers. But the truth is he's also wrong to compare like with like in income terms. The contractor may well have a higher pay rate than the salaried person: it's a risk compensation and the employer can pay it as they are not paying NIC. And then they can offset expenses in the company the employee can't as the rules for employees and companies are different and not because they are fiddling. So a higher actual income may result in a lower taxable income, which is a massive saving as many of those expenses may be incurred anyway. And, in addition, there's that NIC saving to take into account to.

The result? It's likely that at a minimum the contractor will pay at least £5,000 less in tax, and save the NIC too. Chas said they'd pay £13,500 more. He got the total wrong by near enough £25,000. Thank heavens for any potential clients that Chas is not in practice. But the ACCA may be thinking it's time to find a head of tax who can do tax, or might even understand it, at least in theory.

Interesting, but doesn’t (£34,370 @ 20%, £115,630 @ 40% and £50,000 at 50%) actually equal £78,126?

Sorry – yes – to come to the total you add on the NIC of £7,337 in both cases

Dammit – you caught me out too….

The tax is still the same though and my summary is correct

Agree 100% with you and Michael that the ACCA guy is completely wrong

Would be grateful of clarification for my figures below in order to set an exam question for my students

With all earned income tax payable is £78,126

If £160,000 of dividend income the tax payable is £52,822 which would be offset by credit of £17,778 to produce income tax bill of £35,044

Chris

No figures below….

If they’re the ones quoted I think they’re wrong

I stick by the fact there is no difference by the way….

There never has been

I agree that your simplified view of how tax is applied is really the way it should be viewed, but I think you might have slightly over-calculated the income tax due on the dividend, because when you add the notional 10% tax credit it means that the dividend is treated as £177,777 of income rather than £200,000 which means only £27,777 falling into the 50% band rather than £40,000.

Actually this shows a rather strange situation where you could argue that people who take dividends have bigger income tax bands. By my reckoning an individual receiving dividends from a Ltd company actually has the equivalent a £38,666 basic rate band and can receive the equivalent of £168,750 before paying the 50%. Obviously where they have a personal allowance I assume they will use that for non-dividend income, but it appears to be a win-win situation. Incidentally the 42.5% doesn’t quite result in tax at 50% because it works out at 48.9% (assuming you remain in the smaller companies rate).

Are you allowing for the fact that if you calculate your way the tax credit is not deemed to be 20%?

The fact that the tax credit is only 10% reduces the income amount when you put it on your return, for every £1 of corporate income taxed at 20% then distributed as 80p it is treated as being only about 89p of income (including a 10% tax credit), rather than £1 with a 20% tax credit. It is taxed at 10%, 32.5% and 42.5%, but you are still taxing smaller amounts at those rates so the income tax bands fit more in them.

For example £38,666 of corporate income taxed at 20%, gives £30,932.80 of distributable income which is grossed up to a dividend of £34,369.78 (including a notional 10% tax credit), but that won’t exceed your basic rate band, whereas an individual receiving £38,666 of income in the normal way would exceed the basic rate band by over £4,000.

Since we are looking at a personal service company, you can’t ignore the corporation tax that is paid on the initial profit of £200,000, so the total tax would be £75.045 as against £78,126, plus the employee NI saving, which tots up to £10,418. And of course, if your starting point is a company surplus of (pre-tax) £200,000 you’d have to figure in employer NIC, before you get to the gross salary.

I haven’t ignored the CT

It’s a tax credit in my calculation….as it should be in anyone’s

Agree that this is in line with my approach which ignores the NIC

If £200,000 all earned income the IT is £78,126 giving net income of £121,874

Profits of £200,00 in company generates CT of £40,000 leaving £160,000 to be paid as dividend. This dividend would generate IT of £35,044 which gives our lucky person the slightly higher figure of £124,956 to spend

Sorry – dividends of £160,000 are net of tax

Not sure how you get your numbers….

I’m not arguing, Richard, but we may be at slightly crossed purposes!

I assumed the company had a pretax profit of £200,000, and paid £40,000 corporation tax, leaving £160,000 to pay out as a dividend. The tax credit on that is £17,777, (ie 1/9th) so the personal tax is calculated on £177,777.

See another answer just made

This is all notional

You can do it either way…

I’m confused on two things.

How can anyone be charged or pay NIC on a dividend?

Direct Gov says that the tax “credit” on a dividend is 10% of the “dividend income”. If so, on a cash dividend of £160,000 (the money left after paying the corporation tax of £40k) the “dividend income” is £177,777. Surely that means a tax credit of £17,777?

If so, what happens to the remaining corporation tax of 40,000 less 17,777?

There is a no tax on dividends

The tax credit of 1/9 is notional

20% is actually paid

If you calculate tax on the £177,777 you use higher rates of 32.5% and 42.5%

If you calculate on £200,000 with a credit of £40,000 you use 50% and 50%

The results should be the same

But if you calculate using the £177,777 only £27,777 falls in the additional rate band of 42.5%, whereas if you use £200,000 (and assume a tax credit of 20%) then £50,000 falls into the 50% band.

Looking purely at the additional rate situation it results in a difference between:

32.5% (42.5%-10%) on £27,777 which is £9,027

and

30% (50%-20%) on £50,000 which is £15,000.

You have that wrong:

Do the whole calculation

Then take off the credit

It’s not obvious to me why they should be the same, given the differing percentages, and they aren’t. Working on £177,777 the income tax (not corp tax) is £35,370. Working on £200,000 and taking credit of £40,000, the tax is £38,526. But disregarding these differences, your initial point is well made, a professor should be able to do this standing on his head…

“If you calculate on £200,000 with a credit of £40,000 you use 50% and 50%”

Richard that’s obviously wrong, but if you meant 40% and 50% that is equally wrong. So is the “credit of £40,000”; we haven’t had that since the abolition of ACT.

The true alternative is to calculate the tax on the NET dividend at 25% for higher rate and 36.11% (recurrng) for additional rate. The problem, as Paul points out, is that to calculate the bands correctly you need to do it properly and gross up by the tax credit.

So, net dividend £160,000, gross £177,777. Deduct BR tax band only (as PA is lost at that income level) at £34,370, leaves £143,407. Of that, £115,630 is liable at higher rate, 22.5% (32.5-10) so tax of £26,017. £27,777 is liable at additional rate, 32.5% (42.5 -10), £9,028.

So total tax is £40,000 CT, £35,045 IT, a total of £75,045, which is within a pound of Chris’s calculation above that you said you thought were ‘wrong’, and also with Christie Malry’s… Both of them are right, your £85,463 is wrong.

OK

Game over

Mea culpa

My quick check was a lot more accurate than Chas

But not right

Shows I’ve never actually done the calculation for anyone before….

Apologies

Ego te absolvo…

Thank you, my lord

And now I note Ben Saunders was involved in computing your figures….cooperating with an unnamed person claiming to be a chartered accountant on the web

How ethically dubious….

Just to be clear, I worked the figures out myself, and was then relieved to find that they agreed with Christie’s. Hadn’t even noticed the hat-tip to Ben, and since Ben and I normally work in different offices (though as it happens we are at adjacent desks today as I am in Central London for a meeting) I didn’t realise he was involved.

There is no one called Christie

Why the collusion in his deception?

Because I’ve read the book… You don’t mess around with Christie Malry…

More seriously, I don’t have a problem with people wanting to be anonymous on the internet. Most of what I post is under my Twitter login, threfore named; my Tripadvisor and a few other things are under an alias

I have problems with people representing they’re FCAs when they’re not, or are and are not owning up to their identity

Tripadvisor is not a regulated activity

They’re very different things

I’m surprised you can’t see that

Wow, it takes another heavyweight to convince you, Richard. You certainly don’t give up easily, which is how you’ve got to where you are!

But I say sorry when I’m wrong

I had genuinely not worked out that 50% consequence before

I’m going to be spitting fire about it now….

Might I suggest that this discussion is evidence that the tax system is too complex?

Believe me, if that was the extent of the complications, no one would really complain!

I agree…

And for those who questioned it …..I’d never done a 50% calculation on this before….shall we get over it?

My hypothesis was right despite the error – more than can be said for Chas – which was always my point

But it’ll teach me to double check first next time!

[…] of the things that I thought I might put here is a little response to the remark made by Richard Murphy regarding me “cooperating with an unnamed person claiming to be a […]