Higher Taxes on Entrepreneurs Imposed by the Budget

Wed 08 Jul 2015

There were some eye catching announcements in the Budget – national living wage, reduction in corporation tax and increased investment allowances. What was less obvious were the tax increases for UK SME owners.

One of the themes of the Budget was to seek to improve UK productivity which lags far behind the US, Germany and France.  There were a series of headline catching announcements along these lines all of which might have some impact on SME’s.  There was the new national living wage which in theory will marginally increase payroll costs. There was compensation for this cost in the form of corporation tax reductions and there was an increased level of tax depreciation for investment with Investment Allowance going up to £200,000.  For the smaller SME there were NIC reductions to further compensate for the living wage cost too.  All of these will attract debate and no doubt exaggerated claims about their effect over the next few weeks but just like the minimum wage they will have only a small effect on SME’s.  At the margins they may encourage investment and increase productivity.

What is less in line with the government’s narrative are the significant tax increases which will apply to entrepreneurs as a result of two other changes.  The first is a change in dividend tax.  This will make it much more expensive for the owners of SME’s to take profits by way of dividend.  The second is that tax deductible pension contributions for some will be reduced to just £10,000.  The combined effect will make it much more costly for the SME owner to extract profits from a company and much more costly to save for the future.

As a result SME owners are likely to keep more in the company rather than being able to spread risk by building up a pension pot or other wealth alongside the company.  They will probably also want to look at earlier stage partial realisation of their shareholding in an SME so as to de-risk.

Maybe also some owners will feel they are bearing a disproportionate share of the tax burden compared with multinational companies who are able to move profits offshore? Maybe they will be right.

For further information please contact Lindsay Pentelow on lindsay.pentelow@mazars.co.uk