We’re now a month into a new financial year and the dawn of a new April invariably beings is a wave of changes to the financial industry – more specifically, the taxing system. The Summer Budget of 2016 announced by George Osborne proved no different at all from its forefathers with a host of changes, specifically to the contract world which of course will involve many immersed in the virtual assistant market here in the UK.
The headlines don’t make easy reading. A heightened tax on dividends, restricted expended for umbrella contractors, an increased rate on loans and a rise in tax free personal allowances are just a few examples of the way the financial world has shifted post April.
The one that’s caught many a headline in recent months is the news all taxpayers in receipt of dividends in excess of £5,000 will see their tax liability on those dividends increase. For basic rate taxpayers it comes in at a 7.5 per cent rate on dividends over £5,000, and higher rate taxpayers hitting an impressive sum of 32.5 per cent. It doesn’t need explaining that small businesses particularly, those who rely on the benefits of dividends payouts will be the ones feeling the hit on this particular move. It directly hits those who choose to rewards themselves last and only when the business is profitable, which in a wider sense sounds like an option with it priorities firmly in check.
If you choose a small salary and a dividends as a way to keep yourself paid, the lack of personal tax made the move to do so very appealing. If you heavily rely on this method, that 7.5 per cent can soon add up even for a basic rate tax payer, especially with the 10 per cent credit which gave a head start now gone.
The move has been tabbed a ‘tax on success’ – a bitter sweet pill for entrepreneurs to take when they see their business profit and grow, they’ll be hit with more stings in the tax tail for their achievement. When the harsh realities of running your own business involve a 24/ 7, 365 work ethic, no sick pay, holiday pay, responsibility, pressure and obligation to tend to your business whenever required, it can be seen to be taking away one of the few pleasures left in a very autonomous business lifestyle. Yes entrepreneurship is about chasing dreams and living passions but finances – the peaks and opportunities are the cornerstone of all business minds. Does this move send the right message to those willing to put themselves on the line and go it alone in business?
Yes, it great to say you run your own business, not so great to say that despite your business growing steadily, your personal finances are crippled as you are on a wage as managing director many a trainee would smirk at. It too doesn’t sit too prettily against the well-broadcasted news headlines of major multi million dollar international corporations such as Google, Facebook and Starbucks who have been more than a little coy surrounding their own tax affairs.
The outspoken movement in resistance was quick to pick up pace, a government petition against the plans failed to secure only half of the minimum signatures needed to get the matter raised in Parliament. Interestingly, the response from government sees lower and competitive tax rates as the ‘best way’ to support growth and enterprise in the UK.
With small business estimated to make up a colossal 99.3 per cent of all private sector businesses, the danger has been raised that it may put off entrepreneurs and startups – business that could make a real difference to the economy and jobs market. Many feel personally penalised – the financial benefits to be found in dividends for many are not the driving force to do business, just a benefit that makes it workable. Tax-dodging it is not, and the stigma attached leaves a nasty taste for many who are simply trying to make ends meet. The wording on the government response to the petition to “reduce the incentives for tax motivated incorporations” could be seen to have a one fits all solution which sits all businesses in the same boat at the same level.
The pressure on the move to work is big – it has been estimated that just shy of half of the £6.8bn the Treasury expects to raise through the changes will come from the UK’s estimated 750,000 contractors, with the remaining amount raised from individual share and investment portfolios.
A proposed reduction in the rate to just three percent from 7.5 is a compromise which acknowledges a need for some change, but one that is feasible. The arrival contextually of the national living wage and auto pension enrolments around the same time builds a strong case for an increasing amount of pressure on the business holders we should surely be making it easy for?
The ‘ins’, ‘out’s’ and technical ‘if’s’, ‘buts’ and ‘maybes’ could go on forever. The most concerning it could be argued is that at a time when our economy and our consumers crave new business, new products and new services, those willing to make the step and go it alone have got one less benefit to lure them in to the hard self employed slog. Share your thoughts and email us at firstname.lastname@example.org.