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Pre-Budget Report Contains Tax Bombshell For Self-Employed

by Robert Lee, Tax-News.com, London

16 December 2003


Self employed workers in the UK who have formed their own firms and become owner-managers could soon find themselves paying a great deal more tax thanks to proposals hidden in the small print of Gordon Brown’s recent pre-Budget statement.

This warning comes from Anne Redston, a tax partner at accounting firm Ernst & Young, who told BBC Radio Four at the weekend that the proposals represent a “time-bomb” for the self-employed.

“Buried away deep within the Treasury papers is a promise that he is going to take the right amount of tax from owner managers of small incorporated businesses,” said Ms Redston.

"And the worry is that he is going to put National Insurance on the dividends paid to these owner managers," she added.

A popular route for self-employed business people in the UK is to form a company, which allows them to receive income in the form of dividends, which attract a lower rate of tax than salaried income.

However, contained within the pre-Budget report is the statement: “The government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals' tax liability."

The report continues by revealing that the government intends to bring forward a proposal earmarked for the 2004 budget that will “ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company."

Ms Redston warned that this could have serious implications for those who have already incorporated.

"Incorporation is relatively straightforward. But the opposite - unincorporation - is much more difficult," she warns.


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