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Dividend tax changes haven't picked the 'tax lock'

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20th Aug 2015
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In the 9am lowdown Nimesh Shah, partner at Blick Rothenberg commented, “George Osborne’s first conservative Budget pledged a ‘tax lock’ for the duration of Parliament, with no increase to income tax, VAT and national insurance, but the increase to the dividend tax rates seems to be exactly the opposite.”   

But, the ‘tax lock’ will be a legal reality when the Summer Finance Bill 2015 is passed as Finance (no. 2) Act 2015 – probably in mid-October 2015. Clause 1 of the Bill requires the Government to keep the basic rate, higher and additional rates of income tax at or below their current rates of 20%, 40% and 45%, for all tax years beginning after the Act is passed until the next General Election.

So that will apply to tax years: 2016/17 to 2019/20. Note the tax lock only applies to income tax rates, not to the tax bands those rates apply to.

The new dividend tax set at: 7.5%, 32.5% and 38.1% in 2016/17 doesn’t affect the income tax rates cited in the ‘tax lock’, so it doesn’t break the letter of the law. However, some may conclude it contravenes the essence of the promise made by David Cameron in the pre-election period.  

The tax lock provisions in the Finance Bill don’t cover NIC, as national insurance measures are traditionally dealt with in a National Insurance Bill, not in a Finance Bill. However, the Summer Budget announced that the tax lock would only apply to class 1 NIC (paid by employers and employees) not to classes 2, 3 and 4 paid by the self-employed.

The March 2015 Budget proposed that that Class 2 NIC should be abolished. This will leave only Class 4 NIC payable by the self-employed, which will be reformed to include a contributory benefit test – effectively merging Class 2 and Class 4 NIC. We are expecting a consultation paper on these reforms to be issued in the Autumn, but the outcome is likely to be a rise in the rate of Class 4 NIC from 9% to perhaps 12% to bring it in line with employee’s class 1 NIC.

There is a separate ‘VAT lock’ in clause 2 of the Summer Finance Bill 2015, which will require the Government to keep the standard and reduced rates of VAT at 20% and 5% respectively. The same clause also prevents the Government from removing goods and services from the list of items currently covered by the zero and reduced rates of VAT, for the entire period of the Parliament.    

However, the notes to the Summer Finance Bill admit that changes to the VAT base can be made by primary legislation if that is required following a court or tribunal decision, or in response to infraction by the EU Commission.

For example, the recent UK Government defeat before the European Court concerning the application of the reduced rate VAT on the installation of energy-saving materials (such as solar panels) will mean the UK law has to be changed to apply to standard rate to those services. R&C Brief 13/2015 announced  that this VAT rate change will not apply until at least 2016. 

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By justsotax
20th Aug 2015 15:53

isn't that the same

excuse the tax avoidance schemes use...they are not breaking the 'letter of the law'...one rule for one (albeit he is a politician...shouldn't expect anymore)

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7om
By Tom 7000
21st Aug 2015 16:37

tax lock

yeah...but where does it say the 7.5% is locked...

 

I can see it going to 25%

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