Frozen! Temperatures, Allowances & Growth
As well as moving into winter with an energy crisis, it's not just the temperature which is freezing. The Chancellor today froze (and reduced) many allowances, going cold on small business growth.
Income tax, national insurance, inheritance tax thresholds are all frozen for over 5 years until April 2028 and the VAT threshold frozen at £85k until April 2026. The real cost of this is usually large enough, but in a climate of increasing inflation, it's even greater.
Small company owners could aim to take fewer dividends, but they too have to pay higher energy bills and mortgage costs. Sole traders and partners who can't control the income tax band they're in may be surprised at the additional income tax and national insurance in future tax bills, possibly encouraging them to become limited companies where they can decide what to take as income. Each case will be slightly different.
Parents should also remember that the real value at which they have to refund child benefit is reduced, again, another reason to be a limited company to help ensure they don't have to increase their effective 'tax' rate further.
With capital gains tax tax free allowances reduced from £12,300 to £6,000 from next April 2023 and only £3,000 from April 2024, many more taxpayers, including business owners and landlords, will start to pay capital gains tax on modest gains, costing up to £2,600 of additional capital gains tax.
Similarly, reducing the dividend tax free allowance from £2,000 to £1,000 next April 2023 to only £500 from April 2024, catches many small investors as well as small company owners who even paying only basic rate tax will pay an addtional annual £131 on top of the additonal £446 previously announced due to the 1.25% dividend tax increase, a total of £577 each year.
Calling it a reduction in the additional rate threshold sounds harmless, but it introduces the 45% income tax rate at income of £125,140 instead of £150,000. For small company shareholders, this means dividend tax will be 39.35% on income over £125,140. This is after paying at least a further 6% of corporation tax, a total of 25%, in their company. That adds up to a lot of tax for a risk-taker living off uncertain, volatile profits.
NB HMRC is unlikely to be sufficiently resourced to deal with the increased number of tax returns, affecting service levels going forward.
How will any of the above help growth?
It can't be a way to encourage smaller businesses to grow beyond inflationary price increases. The additional effort offers little personal reward unless you aim to grow and sell quickly, recognising a capital gain paying 10% tax when you sell up! In the meantime, your dividend tax will be 8.75%, 33.75%, 50.62% or 39.35% depending on income levels.
Or you could take the view that you'll save corporation tax through significant investment waiting for a return in the longer term, taking out smaller, affordable salary and dividends or encourage third party investors to help fund you and your company.
For those claiming research and development (R&D) allowances or tax credits, the SME scheme is watered down because of the high levels of spurious claims. The additional reduction to tax was 130% and will become 86% from next April 2023, with the cashback rate being reduced from 14.5% to 10% at the same time.
The combined effect on £100 of R&D for a loss-making company is a reduction to the cashback from £33 to £18. Hardly a sign of encouragement. It'll be more valuable to carry forward this tax loss to save higher corporation tax of 25% or 26.5%, if you expect to achieve taxable profits in the near term and in the meantime you can manage your short term cashflow accordingly.
This is a Chancellor and ex-Chancellor who seem to have frozen out small businesses and the contribution they bring to the economy. If there's a good business idea, the general theme seems to be find an investor or other funding to grow enough so that increased tax bills are affordable. We won't know if this has worked for some time.