Good Evening !
Been reading the site for a while, wanted to share this as my own personal example of why increasing a tax -- may result in less gathered. So in the recent budget, the UK chancellor decided to go after my company :( I run a limited company with me, myself and my multiple personalities as the sole employee.
To avoid tax, my company pays me a low directors fee (which happens to be the limit of my annual tax allowance), then after other company expenses (accountancy fees, travel costs, my lunch ^^), the company then pays 20% corporation tax. Whatever remains gets paid to me as a dividend which is tax free -- which is most of my income. So the chancellor in the recent budget wants to put a stop to this and announces a new 7.5% tax on dividends *sniff* in the next tax year after the first £5k. So what to do, just cough up like he wants ? A quick back of an envelope calculation and the total tax he wants will be a significant dent for my household income.. so sod him.
Next day, there is a sign on my bedroom door (a.k.a. my office) offering employment as my company decides the required paperwork is just too much for the sole employee and it makes sense to have spare capacity in case my companies clients require additional projects. My wife wanders in and applies - she is so bright and enthusiastic about the role she is given the job on the spot. We agree on a fixed salary of the exact amount of the tax free allowance.
The employee forms a new union called (Pay Less Tax Union) with the director and complains to the sole shareholder (me) at the lack of decent pension provision. After a hard battle, the director is delighted to announce a new company pension which under close inspection happens to match the amounts paid by the director and employee used to pay out of their personal bank accounts.
Net Result: The company has higher expenses (employee & pension costs), so far less corp tax is paid on the remaining profit. Household income has now increased (since employee costs are now almost pure profit, rather than being subject to corp tax as a dividend), household income now under threshold of next years dividend tax.
Only downside, money is going into pensions which cannot be accessed until ~57 or later. Other plans needed to be able to FiRe at 50.
