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Small business owners hit by tax increases in Budget 2017

March 8, 2017

Millions of small business owners will see the amount of tax they pay go up following the Spring 2017 Budget.

Chancellor Philip Hammond announced in his Budget speech, plans to increase the taxes paid by the self-employed and limited company directors.

Self employed hit by NIC tax hike

Those working as self-employed will see Class 4 National Insurance Contributions rise from 9% to 10% in April 2018, with a further increase to 11% in April 2019.

This will see sole traders with annual earnings of £43,000 paying an extra £350 in Class 4 NICs in the 2018/19 tax year, rising to an increase of £700 in NI Contributions in 2019/20.

The abolition of Class 2 NICs, announced in the 2016 Budget, will also come in to effect in April 2018. This represents a tax cut of around £130 a year for those working as self employed, but the net result is still a big increase in tax to pay for sole traders.

However, after being criticised for hitting entrepreneurial people and the so-called ‘white van man’, Chancellor, Philip Hammond announced a U-turn on the proposed Class 4 NICs hike for sole traders.

Limited company directors face dividend tax increase

But it’s not only self employed small business owners being hit by a Spring 2017 Budget tax grab. At the same time, small business owners who are running their business as a limited company will also have to pay more tax.

From April 2018, the annual tax free dividend allowance will be slashed from £5,000 to just £2,000.

This will mean a tax increase of £600 a year for the vast majority of small business owners running a limited company.

The tax free dividend allowance was only introduced when changes to how dividends are taxed were introduced for the 2016/17 tax year.

These changes in company dividend taxation had already brought in tax increases of thousands of pounds for many business owners, so being hit immediately by another tax rise will be seen as a kick in the teeth for entrepreneurs up and down the country.

Owners of limited companies will however, benefit from the previously announced cut in corporation tax from 20% to 19% being introduced in April 2017. This will somewhat soften the blow of the cut in the tax free dividend allowance.

Small business reaction to Spring 2017 Budget tax increases

Understandably, small business groups are angry with the tax increases. Immediate reactions to the announcement include;

Federation of Small Business

“The National Insurance rise to 10% next year and 11% in 2019 should be seen for what it is – a £1 billion tax hike on those who set themselves up in business. This undermines the Government’s own mission for the UK to be the best place to start and grow a business, and it drives up the cost of doing business. Future growth of the UK’s 4.8 million-strong self-employed population is now at risk. Increasing this tax burden, effectively funded by a reduction in corporation tax over the same period, is the wrong way to go.”

Chris Bryce, IPSE Chief Executive

“If you are one of the hardworking self-employed people who face a significant increase on your tax bill, you might feel that the Chancellor has it in for you.”

“When you look at the additional support offered for business rates it appears as if the Chancellor is supporting SMEs by hitting entrepreneurs and the smallest of businesses.”

“Adding in the reduction in Dividend Tax allowance, whether you work as a sole trader or through a limited company you will be facing higher bills. The Chancellor shouldn’t forget that growth in self-employment has driven our labour market in recent years and punitive rises in tax will make many people have second thoughts about striking out on their own.

“It’s entirely right for the Chancellor to look at taxation of the self-employed, but changes should only come after a thorough consultation with the business community, which has not taken place.”

Nigel Green, Founder deVere group

“This tax grab will hit millions of Britain’s hardworking entrepreneurs. This group of self-reliant people are the lifeblood of the economy. They take on the risks and expense of running a business, whilst simultaneously creating jobs and wealth.

“Hiking taxes on the self-employed punishes ambition and undermines aspiration to get on in life. Slapping on extra penalties and putting up additional barriers disincentivises people from launching new enterprises.

“Placing extra burdens on the self-employed will, I believe, turn out to be a masterclass in the law of unintended consequences. It will backfire by further reducing the tax base to even fewer people.”

Lucy-Rose Walker, CEO of Entrepreneurial Spark

“Increasing National Insurance rates for the self-employed could be a further step by the government to penalise those who are taking risks and starting a business, often giving up their regular pay cheques to take a chance at creating something great,”.