Budget could force small business owners to shut up shop and sell up

Risk is a major contributory factor to many small business owners setting up shop for the first time. In order to separate themselves from any accrued debt, they can choose to form a limited company. In other words, their liability for debt is ‘limited’, should their product or service go belly up or out of fashion.

Creating a Limited Company comes with its own additional burdens. The company owner has to pay both Employers and Employees NICs. The budget has reduced the effect of this relief for single-employee company owners.

And, to stave off advances from the tax man, most often choose to hire an accountant to prepare their income and expenditure for annual self-assessment. Using an accountant also makes it easier for financiers (mortgage providers excluded) to understand any risk of loaning to their business.

These are costs that permanent staff and employees do not incur. So, to soften the blow, the single-employee limited company owner, often a freelancer or specialist skill contractor, has always been able to pay themselves with a low salary (to negate NI) and dividends, which are tax free (for lower-rate taxpayers).

This week’s budget has not only set these plans asunder, but according to KPMG, could incentivise many to “put themselves up for sale”.

This table goes some way to explaining the net effect the dividend rate will have on the tax shareholders will be liable for after the changes come into effect next year:

Dividend Tax Rate vs Income Bracket
Income Tax Bracket
20% 40% 45%
Current Dividend Rate 0% 25% 30.56%
Dividend Rate post Apr ’16

(after £5k Dividend Allowance)
7.5% 32.5% 38.1%

The progressive reduction in corporation tax will help soften the blow. But the Chancellor’s plans to eradicate interest on personal savings, which he’s using to make his calculations work, miss one vital factor.

Many of our business customers use ISAs as a tax-free way of saving as it is. The key point the Chancellor’s missing is that people have got to have money over to qualify for the tax-free savings benefit.

The squeeze is tightening further on single-employee limited company owners. To offset the dual NI payments, at present, they can also claim £2,000 NICs relief. The budget has made limited company owners where they are the only employee exempt from this relief.

All told, it’s easy to see why KPMG (and the business banking community) forecast that many small business owners will sell up before the new system takes hold. The extra mile entrepreneurs travel to achieve their independence just got a fair stretch longer. At a time when the economy needs solopreneurs to spread their wings, the budget has filled their boots with lead, instead.

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