The Government has responded to the dividend tax petition that has now received over 26,000 signatures. They are required to respond to any petition that obtains over 10,000 signatures and must consider a debate if the total number of signatures exceeds 100,000.
They claimed that they are committed to supporting both entrepreneurs and a fair tax system.
They further commented that the best way to support enterprise and growth in the UK is by lowering more competitive Corporation Tax rates. In addition to this, the Dividend Tax reform allows reductions for the incentives for tax motivated incorporations.
They defended their stance of reforming the dividend tax by stating changes announced in the Summer Budget which will benefit small company owners. These advantages include increasing National Insurance Employment Allowance to £3,000 from April 2016 as well as a permanent increase to the annual investment allowance to £200,000 from January 2016.
As a result of increases to both tax-free Personal Allowance and the Higher Rate Threshold, individuals will pay less tax as of April 2016. They committed to increase these further within the next five years which will benefit small business owners further.
However, the Government has clarified that they cannot continue to reduce Corporation Tax rates without reviewing “the overall balance of the tax system, including the taxation of dividends”. Reducing the Corporation Tax rate without increasing elsewhere would cause individuals to set up their own companies and pay themselves through dividends to decrease their tax bill.
Their final comments highlighted that reforming the dividend taxation will not only simplify the tax system but also will discourage individuals from setting up their own company and paying themselves through dividends instead of a wage to reduce their tax bill. Taxpayers and Exchequers will be £500 million better off due to these changes and any individual who continues to work through a limited company will continue to pay lower rates of tax rates than the employed and self-employed.
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