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Contractors slam government petition reply

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12th Oct 2015
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The government’s response to the petition asking them to reconsider the new dividend tax hike illustrates a fundamental misunderstanding of contracting and a bias against small business.

The rule with these petitions is when they reach more than 10,000 signatures, the government must respond officially. Of course, no one was expecting something other than a standard equivocating reply from government when the petition did eventually cross the magic 10,000 mark.

The three paragraph response hasn’t done much to defuse contractor’s frustrations. In fact, it seems to have heightened them. The response has drawn the ire of many, notable is James Leckie of ITcontracting’s fastidious deconstruction of the government’s response.

As expected, the government defended its plans pretty stridently. “Taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation,” it read. “Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed.”

This, according to Leckie, is a total misunderstanding of how and, importantly, why contractors work. “This is a profession and a way of life,” said Leckie. “Not some short-term ‘tax saving opportunity'.” There are many that would disagree with Leckie on this point, though. But he also questions the government’s motivation.

“As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates,” reads the government response. Further on its reply, the government response reads, “It is not possible to continue to reduce the corporation tax rate without looking at the overall balance of the tax system, including taxation of dividends”.

As Leckie points out, raising tax on the little guy to fund a lowering of CT is perhaps a little lopsided. “The treasury could raise even more funds through ensuring large companies actually pay the tax they owe, rather than allowing corporations to channel their profits through complex offshore tax structures,” wrote Leckie. This argument is particularly relevant when you see reports that Facebook UK paid less than £5,000 in corporation tax last year.

It’s also a question of who benefits. The main rate of corporation tax has fallen significantly in the past few years, tumbling from 28% in 2009 to 20% this year. “However, this is the rate paid by larger companies with high profits,” wrote Leckie. “Those making £300,000 or less per year have been paying Corporation Tax of 20%, or 21% since 1998.”

The government’s beneficence on corporation tax has only been extended to large businesses, and in their response, they acknowledge the dividend tax hike is one of the ways to foot the bill.

The official response did try to sweeten their indifferent reply, however, stating that “owners of small companies will also benefit from a range of other measures announced at the Summer Budget, namely contractors will pay less tax as a result of the increases to the tax-free personal allowance to £11,000 and to the higher rate threshold to £43,000 in April 2016.

But this is a pretty unconvincing and misleading assertion, noted Leckie: “Successive Governments have been guilty of exploiting ‘fiscal drag’ to raise taxes whilst appearing to be benevolent to taxpayers”. This ‘bracket creep’ (where inflation pushes nominal wages into higher tax brackets) often goes unnoticed among the electorate, making it a favourite political beach ball.

Rather than implementing price index linked tax brackets (which would handily solve the issue, but are politically undesirable), a government will adjust tax brackets manually every few years, effectively restoring the real tax rates to pre-inflation levels. The benefit is, of course, that this looks like a tax cut.

“The higher rate threshold has not risen proportionately,” said Leckie. “The Institute for Fiscal Studies says that even by raising this threshold to £50,000 over the lifetime of this parliament, a further 300,000 people will be paying higher rate tax – 5 million in total.”

What do you think of Leckie’s view? Crying over spilled milk or does he have a point?

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Replies (34)

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By johnjenkins
12th Oct 2015 16:26

Government

want all one man bands on PAYE. Nice little earner and a substitute for IR35. It will their downfall. Still DC doesn't give a monkeys cos he won't be there. Just watch the coffers go down as the "under the table" brigade increase.

I signed this petition and also the Landlord's one.

I think Leckie is spot on. I wonder what Mr. Murphy thinks.

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By jamesleckie
12th Oct 2015 18:46

Incorporation choice

Thanks for mentioning my article.

Also, worth bearing in mind is that contractors can only take on work via an intermediary (limited company or via an umbrella) - there is no choice in the matter. Contractors don't simply choose to incorporate as an alternative to becoming employees (i.e. merely to save tax). Clients will not employ contractors on a PAYE basis - the whole point is that contractors work on a b2b basis, and the client has no employer-type obligations towards them.

Contractors take a lot of risk - and have no employee-type perks. Why on earth shouldn't they have some kind of tax advantage to compensate?

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By hallsi
12th Oct 2015 21:50

As we know...
As we know CT raises a fraction of the tax revenues compared with PAYE, VAT and Income Tax and therefore it's easy to give away CT rate reductions at Budget time. Asking SMEs including Contractors to supposedly pay for this is simply not justified and unfair. It's often quoted that SMEs are the backbone of the economy, in terms of output, employment and tax revenue. Why therefore must these be punished and also constantly ridiculed as tax avoiders?

There's a huge difference between those with relatively secure, employed roles, taking no financial risk, having all equipment provided, being (auto) enrolled into the company pension, getting holiday pay, sick and maternity pay, entitlement to bonuses, gaining contractual rights etc and those who run their own business, whether this be a one person freelance company or larger enterprise.

The self employed not only give up a lot of benefits and rights, they also tend to work a lot more hours. Why then shouldn't they be able to take advantage of their rewards? As a Ltd Co freelancer myself, I am now wondering whether it is really all worthwhile.

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By GW
13th Oct 2015 09:56

Even more worrying

While I agree with the opinions expressed above I find the following line even more concerning:

 

"These reforms, which will also simplify the dividend tax system..........."

 

How can anyone consider the changes as simplifying the system? - new tax rates, partially disregarding some of one source of income etc.

 

What is going to be simplified next?

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By johnjenkins
13th Oct 2015 11:29

We all know that

before the next election he will up the £5k free of tax divi. However with labour now doing a Uturn he will come under a lot of pressure to up it earlier. A lot will depend on how he sees IR35. If this divi crap was to replace IR35 then maybe he won't increase the tax free bit. Even so he now has two stupid taxes to play with.

I bet a lot of people who defected from Lib/Dems now wish they hadn't.

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By dogsbreath
29th Oct 2015 11:08

Incorporation is required

The amusing thing is that one can't contract for the gubernment *unless* you work through a limited company.  It's required along with all the insurances,   etc.

Not that it matters nowadays as since they've implemented their G-cloud bidding system. It's all being outsourced anyway;  mostly offshore and frequently outside of Europe to places that pay their staff less (but still bill full rates)

d'Oh

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Replying to lionofludesch:
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By louisVW4
14th Oct 2015 12:18

I take your point...

...about working for government and incorporation, and would reinforce that with G-Cloud being focused on placing business with SMEs, but have to disagree with your point about G-Cloud being a 'bidding system' with the Indians bidding lowest.  

G-Cloud is not a 'bidding system'.  You submit your response through an OJEU-based tender process, along with your pricing, and if you are selected, you are placed on a list of 'approved' suppliers, who have all agreed to supply under the same contract form.  This should reduce the work and cost for SMEs to respond to tenders, and pricing is meant to be transparent.

We are now doing well with G-Cloud, but having taken the risk in forming our own business in our 50s (having worked for large multi-nationals on PAYE and paid vast amounts of tax), we struggled for some time, and relied on the slight 'benefit' dividends gave us, and supplemented that with rental income.  We didn't claim any benefits ...not even tax credits, so we even subsidised those on tax credits.  Now we have gone through that pain of low income, no paid holidays, no sick pay, unpaid invoices, etc..., and paying our taxes when required, and the outlook is looking good, we were looking to employ more people.  

The government's actions against SMEs and the small private landlord will prevent our investment in people. 

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Replying to lionofludesch:
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By njpandya
28th Oct 2015 11:07

"And,  of course,  they don't

"And,  of course,  they don't pay UK tax." Really so why don't you go & tell "gubernment" Glad Dividend Tax is here. So many crying babies.

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By moneymanager
14th Oct 2015 10:49

Mission creep

I am not being rude to our Chancellor or David Gaulke in the above but contentions of "introducing fairness" in circumstances such as this and in the BTL finance changes are nothing more than a poor smokescreen of deliberate tax raising. Quite how the taxing of turnover with a limited credit aginst finance costs constitutes any dictionary definition of fairness defeats me. The BTL measure will mean that good landlords spending on mainteance and upgrades will become cash negative while the measure will not level any kind of playing field between BTL purchasers and homeowners. Around 4 in 10 purchases in London and the NW where I  am are for cash and many are foreigners buying for investment. Georgy is simply going to lose both the income tax and CGT by pushing propety ownership offshore.

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By johnporter
14th Oct 2015 11:12

Talk about fairness

Maybe Corporation Tax should just be set at 30% for all business.

Solves the problem of NI contributions in a stroke

Why should one sector have Tax benefits over the other

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By lesley.barnes
14th Oct 2015 11:21

Got a point

Since the changes with agencies I've had several small subcontractors forced to incorporate by agencies. For them it wasn't cost effective to become limited companies when factoring in higher accountancy fees.They worked for several different agencies in a year sometimes two or three in a week. They had no choice but to incorporate - no limited company no work. I've also got a fair few clients that work as subbies for companies in the FTSE 100 through limited companies again no company, no work, no chance of PAYE. If you ask them if they would prefer to be an employee they almost always say yes because of all the benefits.

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By NeilW
14th Oct 2015 11:31

It's an agency issue

Until the government passes legislation that requires all clients putting work via recruitment agencies to employ the contractor directly on a PAYE contract, the issue will never end. 

If the client wants temporary fixed term employees, they should get temporary fixed term employees. Otherwise they should get permanent employees - either full or part-time. 

The agent can still sign employment contracts on behalf of the client - if the client will delegate that authority to the agent. And there is no reason why they shouldn't if the agent is really a recruitment agent rather than an 'employment rights avoidance' agent. 

If they want 'contracts for services' then they should parcel out the jobs to marketing agents working *for* the contractor, or directly to the contractor themselves. 

The problem all comes about because there are obfuscating middlemen in the way trying to avoid various rights. 

It's clear that the government wants everybody on PAYE. So why not just get on with it?

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Glenn Martin
By Glenn Martin
14th Oct 2015 13:14

Double Wammy

I agree with the contractor community and I feel that they have certainly been hard done by the proposed changes.

They are caught in a rock and hard place situation as they have no option to take employment as mentioned above so could not enjoy the benefits that come with employment. So simply have to take it on the chin, as I would imagine there is limited scope to up prices to offset the extra tax, as the market is very competative with overseas workers becoming heavily involved.

For me contractors and the flexible way they work have helped the country come out of recession, as they bring in projects on time and ahead of budget, and are less prone to overrun etc.

The tax benefits they have go some way to offset the perks they miss out such as employee benefits, auto enrolment, 6 weeks paid holidays etc.

I myself trade through my own company and have a small BTL portfolio so I will see my tax burden increase about £4k this year which is substantial for me, as I do not see myself as rich.

I have several clients who also have BTL properties who this will really effect, again they are not what I would call rich, but management level workers who earn just into the higher rates of tax. £45k to £50K. They earn too much for tax credits, child benefit and IMO now have to pick up a high part of the tax burden which is unfair. We run the risk of stiffling ambition as people will develop a "whats the point" attitude as by working harder to move up the management tree any extra earnings are lost in higher tax rates so no real benefits are received. The managers are the ones who drive business and companies to grow, yet they are the ones that will now be clobbered, but the super rich seem to go unchecked.

 

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Replying to paddy55:
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By moneymanager
15th Oct 2015 11:45

Similar boat

Our BTL portfolio is in my partner's name and although significant itself, she has no other form of income. None the less, the finance bill changes result in her hitherto viable portfolio paying some £4000 additional tax at 40%. Assuming nothing else changes that gives a net of everything return of just 1.5%. Fortunately our properties are in a high demand, high rental value area and over the next four years I expect to be able to push rents up across the portfolio to compensate, a zero net cashflow change, an increase in gross yield but a drop in net yield; I suspect that George knows this could happen but won't admit it.

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Replying to Wilson Philips:
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By The Black Knight
15th Oct 2015 11:53

Goerge and Zippy

moneymanager wrote:

Our BTL portfolio is in my partner's name and although significant itself, she has no other form of income. None the less, the finance bill changes result in her hitherto viable portfolio paying some £4000 additional tax at 40%. Assuming nothing else changes that gives a net of everything return of just 1.5%. Fortunately our properties are in a high demand, high rental value area and over the next four years I expect to be able to push rents up across the portfolio to compensate, a zero net cashflow change, an increase in gross yield but a drop in net yield; I suspect that George knows this could happen but won't admit it.

"I expect George hasn't got a clue, have you George?" Zippy

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By Casterbridge Hardy LLP
14th Oct 2015 13:45

CHRYSALIS

At last the New Labour butterfly has emerged from the Conservative party chrysalis - expect much more of the same as budgets go by, the deficit worsens, national debt increases and the squeezed middle makes a spent toothpaste tube look plump.

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By Incharta
14th Oct 2015 14:48

looking to their future career

Small firms are not going to employ ex MP's as Non-Exec Directors on large salaries… big companies may. Top civil "servants" don't live in the real world and MP's are just interested in their future career prospects… SME's will always be at the bottom of the pile in that respect so why would anyone be surprised

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By tommaher
14th Oct 2015 15:07

Time to eject
I am just going to cash in my chips and close the business. I then get my 25 days holiday, company medical, 10 days sick leave, 10 days training and every evening and weekend off. Happy days and stuff the dividends tax

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By twickers
14th Oct 2015 15:52

Contractors/BTL moans

 

I have been around for a very long time but reading these comments makes me think

I live on a different planet/

I would abolish all BTL interest relief/ or charge it to Capital/  this would eliminate o/night

80% of the market/  and makes properties possibly available to those who simple want

to have a home/

As for contractors/  the rates paid are high/ £400/600 a day ? why not give yourself the benefits/ that is

pensions/ holidays you can take when you like for as long as you like/

the new dividend tax if you plan property will not cost you much/ if anything ?

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Replying to Justin Bryant:
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By Michael C Feltham
14th Oct 2015 17:11

What Planet: Must be Nice There?

twickers wrote:

 

I have been around for a very long time but reading these comments makes me think

I live on a different planet.

I would abolish all BTL interest relief/ or charge it to Capital.  this would eliminate o/night

80% of the market  and makes properties possibly available to those who simple want

to have a home.

The core problem with the young bleating about "buying a home!", is affordability. Plus lack of sufficient deposit.

If hordes of B2L unincorporated landlords liquidate their portfolios, this will not really change prices; since these properties will be quickly hoovered up by major incorporated property companies taking advantage of the low base rates. many of them foreign owned.

If UK property prices take a serious bath, then none of it matters anyway: since UK's total wealth is represented by +60% of residential property**.

This is used widely by banks and mortgage lenders to prop up the asset side of their balance sheet. If the residential market crashes, then so will the banks, as their reserve assets would plunge and not conform to Basel III and B of E's asset compliance.

And we will all be skint!

 

** NB: Source ONS Annual Survey of Britain's Wealth

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Replying to Justin Bryant:
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By The Black Knight
14th Oct 2015 17:19

Rents

twickers wrote:

 

I have been around for a very long time but reading these comments makes me think

I live on a different planet/

I would abolish all BTL interest relief/ or charge it to Capital/  this would eliminate o/night

80% of the market/  and makes properties possibly available to those who simple want

to have a home/

As for contractors/  the rates paid are high/ £400/600 a day ? why not give yourself the benefits/ that is

pensions/ holidays you can take when you like for as long as you like/

the new dividend tax if you plan property will not cost you much/ if anything ?

you do

rents will just have to increase to compensate or there will be a lack of investment. No point in running a rental  business at a loss which many have anyway still stuck with about 30% negative equity so they cant afford to sell either.

Dividend tax will mean an extra £1,800 per annum for a basic rate tax lifestyle. You will be hard pushed to avoid this.

the dodgy will just fiddle some more.

On the plus front perhaps the voting public will notice, feel the pain and vote to get us out of europe and etc etc.

 

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Replying to Sarah Z:
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By twickers
16th Oct 2015 12:36

BTL

 

I agree we are on different planets/  yours is new mine old

your planet and this topic subject is  dealing with consequences of current banking/property crisis/ 

my planet has been there before ?/   I recommend you look up the history -cause and solution

to the first one [ mid 1970s]-  you appear to have the same type question as a member of my staff who asked

whats the difference between council tax and rates ?

Contractors/  that area is out of control/ with ex civil servants/doctors teachers -social workers going back

under ltd status as highly paid "consultants" - their biggest problem being their generous pensions and how to extract the cumulating funds paying

minimum tax/

I would abolish IR35 and find a different solution.  hmrc has found ways of dealing with Vat problems/ there are similar solutions I would suggest

to the NHI/tax problems.

I would solve the high paid directors problems/ by disallowing board salaries for corp tax/  let them have what they like but shareholders who approve

pay contribution / not as at present the long suffering basic tax payer ?
 

It is your planet/ ?  you come  up with solution - rather than spend time moaning about the ones imposed on you

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Replying to Justin Bryant:
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By moneymanager
15th Oct 2015 11:55

What's the objective

There are many factors causing difficulty for particularly ftb's and SOME BTL activity may affect them but equally much will not. My own market is heaavily influenced by the demand by foreign and government funded students and both foreiegn and UK execs and specialists on temporary assignments, typically 1-2 years, I have even had some working on UK gov projects! Not that I am affected but as far as I know the measures equally affect student halls and muti-occupier buildings. Where are these people supposed to stay? BTL finance may become less attractive but the demand for rented property from such groups will not diminish. So, these measures may result in less leverage and/or a change from UK to foreign based landlords. George should fess up as to what he is really trying to achieve.

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Replying to RetiredTax:
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By The Black Knight
15th Oct 2015 12:13

Sheer stupidity

moneymanager wrote:

There are many factors causing difficulty for particularly ftb's and SOME BTL activity may affect them but equally much will not. My own market is heaavily influenced by the demand by foreign and government funded students and both foreiegn and UK execs and specialists on temporary assignments, typically 1-2 years, I have even had some working on UK gov projects! Not that I am affected but as far as I know the measures equally affect student halls and muti-occupier buildings. Where are these people supposed to stay? BTL finance may become less attractive but the demand for rented property from such groups will not diminish. So, these measures may result in less leverage and/or a change from UK to foreign based landlords. George should fess up as to what he is really trying to achieve.

 

I think you are looking for logic when you might have encontered sheer stupidity.

The start of many a conspiracy theory I expect.

If they actually listened to the consultancy process someone will have predicted the future for them.

There should be a prize for who got it right then the engagment in the process would not be a complete waste.

These policies are directed by europe anyway the UK government are just puppets.

 

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Replying to atleastisoundknowledgable...:
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By moneymanager
15th Oct 2015 14:34

On the nose

Just received this from Chestertons

–– Atlas Residential – a US Build-to-Rent company which operates 18,000 rental units across 13 states valued at a total of £1.3 billion – is entering the UK private rental market. Working alongside Rockspring Property Investment Managers, it has purchased a 145,500 square foot site in prime central Southampton with the intention of building 211 private rental units, which it will design, fund, build and then manage".Well done Georgie, http://www.chestertons.com/research-and-insight/research/housing-market-...

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By The Black Knight
14th Oct 2015 17:08

why is it always contractors moaning

always contractors

that should have been deemed employment status but denied this applied to them

then

that should have paid dividends but didn't properly (enquiries should easy and be a lot more profitable now lol)

they cloud the issue for the genuine businesses who use the breaks to grow and in compensation for the additional risk of investing in UK plc and putting your house on the line.

Then they bleet that it's not about the extra tax. What other difference does it make to their lives

they are still 18% better off than should be.

 

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By The Black Knight
14th Oct 2015 17:34

petitions and consultations

Petitions and consultations are known by anyone who has taken part to be a waste of time it's a bit like a customer survey that is rigged.

Totally pointless excercise.

what does work

1, riots about pasties

2, terrorism (you might even be a peace prize winner or a highly paid politcian if you shake hands after)

3, newspaper public disinformation (PPR, bedroom tax, pasty tax) They do say you can only change the world by satire.

nearly forgot the most important one 4. Facebook

 

Basically the quiet majority need to step up to the mark and claim their rights above the total tosspots or perhaps engage the services of some rioters

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By tonyhawley1941
14th Oct 2015 19:08

Dividend tax

I wonder why the Tories are so much against small business when they obviously got much support from them in the General Election?

To punish those who are trying to make a living independently with nobody supplying them with paid holidays, sick pay and all the other benefits that one gets from being employed is really sick!

With MPs getting very nice salaries etc. and having very little experience of the"real world" it is quite upsetting in the way they now propose to treat those that gamble on being able to generate sufficient income to pay themselves enough to cover the mortgage and other basic living costs.

 

Comeback Nick all is forgiven!

 

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By North East Accountant
15th Oct 2015 08:57

Lets all work in public sector!

A family relative is nearly 50 next year and thinking of taking voluntary redundancy from public sector job. She asked me to look at the paperwork for her and I couldn't believe how generous the terms were. Also on her payslip a memo  "Employers Pension Contribution 20.9%".

They have no idea at all how it works in the private sector with their flexitime, generous holidays, sick days etc.

For example, a case I'm dealing with at minute the inspector works 3 short days a week only, having taken early retirement and then come back and you have to ring by 2.30pm as he goes home then. The client came at 6pm last night at end of his day and was here till 7.30.

They haven't got a clue so they hammer the living daylights out of us guys as we've got houses, kids etc and can't move offshore.

The new dividend tax is not likely to get any better.

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Replying to Paul Crowley:
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By The Black Knight
15th Oct 2015 09:48

AND you dont have to be any use either

North East Accountant wrote:

A family relative is nearly 50 next year and thinking of taking voluntary redundancy from public sector job. She asked me to look at the paperwork for her and I couldn't believe how generous the terms were. Also on her payslip a memo  "Employers Pension Contribution 20.9%".

They have no idea at all how it works in the private sector with their flexitime, generous holidays, sick days etc.

For example, a case I'm dealing with at minute the inspector works 3 short days a week only, having taken early retirement and then come back and you have to ring by 2.30pm as he goes home then. The client came at 6pm last night at end of his day and was here till 7.30.

They haven't got a clue so they hammer the living daylights out of us guys as we've got houses, kids etc and can't move offshore.

The new dividend tax is not likely to get any better.

apalling really

the undertrodden self employed that support their tyrannical regime should protest.

probably by having a well deserved lay down for a year. The country is bust anyway and we are just delaying the inevitable.

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By johnjenkins
15th Oct 2015 10:33

If we have

the referendum on the EU early (May) next year I think that will be the time that most people that are going to "have a go" will. I don't see it restricted just to leaving the EU. The intense arguements for and against will bring up other issues which will have to be sorted. I see the next two years as turbulent as all the cuts and tax gathering measures kick in.

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By johnjenkins
19th Oct 2015 09:29

If Government and

HMRC left well alone and allow people to work how they want I think you would find a happy workforce, high production and more money in the coffers.

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By michaelcampbell
28th Oct 2015 15:19

It's right to stop individuals contracting to reduce tax...

...but the Government needs to be careful to not be too blunt in their approach.

I agree with Leckie that this is not a short term tax-saving opportunity for most "one-man bands". I often find that many individuals are essentially forced into setting up limited companies by their contracting entity. Marginalising them by raising taxes on all dividends is somewhat unfair.

There's also mention of them needing to justify their tax arrangements to their employer in a further tax crackdown on contractors. That would be a bit of an odd conversation.

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accountant in london
By Accountant in London
30th Oct 2015 10:12

almost at 34k signatures!

https://petition.parliament.uk/petitions/106525

please share as much as you can, thanks

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