AT the last election, it is said many people felt unable to vote for the Labour party on the basis of a lack of a plausible economic plan. Some said the Tories were a more credible, with small business owners and entrepreneurs generally perceived as traditionally their supporters. So why are these people now feeling under attack from this Government, and saying that they regret voting Tory?
Last July, George Osborne announced one of the biggest income tax hikes on small business owners in 20 years.
AT the last election, it is said many people felt unable to vote for the Labour party on the basis of a lack of a plausible economic plan. Some said the Tories were a more credible, with small business owners and entrepreneurs generally perceived as traditionally their supporters. So why are these people now feeling under attack from this Government, and saying that they regret voting Tory?
Last July, George Osborne announced one of the biggest income tax hikes on small business owners in 20 years. This took the form of the changes in income tax on dividends, coming into force last month.
Basic rate taxpayers used to escape further tax on dividends on the basis that the profits that they were taxed on had already been taxed on the company. Not any more. Now, although they get a £5,000 dividend ‘allowance’ (not actually an allowance Mr Osborne, but a zero per cent band as it eats into the money you can earn before hitting higher-rate tax), they are now hit with a 7.5 per cent basic tax rate on dividends. Higher-rate taxpayers see their old effective rate of 25 per cent income tax on dividends go up to 32.5 per cent.
This hike mostly hits small business owners and entrepreneurs, as they are the people that take their income mostly in dividends. A business owner taking an £8,060 salary and £30,000 in dividends will now pay £1,655 more tax per year. Those taking the same salary and £60,000 dividends will pay £2,893 more tax. Many are unaware of this, and will remain so until it starts hitting pockets in January 2018.
This Government loves talking about levelling playing fields in tax terms, but the tax advantages that small business owners and entrepreneurs enjoyed were in themselves a leveller; a small incentive to make up for the risk that these people take, and small reward for the stimulation and contribution they make to our economy, and indeed society. Hiking the tax on entrepreneurs’ dividends has now stacked the odds against them once again.
If business owners and entrepreneurs want to maintain the same level of personal income, then they will need to draw more from their businesses to do it. This will reduce the money left in their businesses for investment and jobs.
Predictably, large corporates and institutional investors are relatively unaffected by this tax.
We are all aware of the deficit problems faced by this Government and the need to raise tax, but surely there was a more sensible alternative.
Most people I know, including the majority of my clients, do have sympathy with the political stance that those with the broadest financial shoulders should bear the heaviest burden and pay the most tax. This certainly applies to income tax, where the lowest paid pay no tax at all, while the richest pay 45 per cent. Why do the Tories not apply this concept to businesses, too?
This Government has progressively reduced the rate of corporation tax rates on large corporates, such that now the likes of Google (when they actually choose to pay tax) pay the same 20 per cent rate of tax as the small company running a corner shop. This doesn’t seem fair. Instead, why not have, say, the top 1,000 richest companies in the UK pay an extra one per cent tax? That would surely have raised more revenue than this dividend entrepreneur tax.
The Government would tell you that it is because we need to remain competitive, but we already had the lowest rate of corporate tax in the G20. Foreign investment is, of course, warmly welcome, but it brings with it its own perils (for example, the steel jobs crisis), and surely looking after our home grown go-getters should be just as important.
It seems to me that this Government are living up to the stereotype of only looking after their big business friends; they seem intent on looking after large corporates, domestic or foreign, at the expense of our small businesses and entrepreneurs, the backbone of our economy.
