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Small business hit hardest by NI and dividend tax hike
by Susie Hughes at 12:54 08/09/21 (News on Business)
The 1.25 per cent hike in National insurance and dividend tax hike is likely to hit small business owners and contractors the hardest.
Prime Minister, Boris Johnson, surprised many by including the 'dividend tax' rise alongside the expected NI increase with effect from April 2022.

The measure are expected to raise £36 billion over the next three years, with much of going toward clearing the NHS backlog created by the pandemic.

National insurance contributions will rise by 1.25 percentage points for both employers and employees - resulting in higher costs for businesses and lower take home pay for workers.

The 1.25 per cent rise in dividend tax will take the tax rate to 33 per cent rate for higher rate taxpayers, but while it may be assumed that this will mostly apply to rich investors, in reality it will likely hit small business owners hardest.

Some claimed that this broke previous promises of no tax increases - while others pointed out that it was unfairly targeting the directors of small companies - many of whom had been denied assistance during the pandemic but were now being asked to pay disproportionately towards the country's recovery.

Investment services, IW Capital claimed that there are currently over six million SMEs in the UK employing 16.8 million people, many of whose founders and directors are paid primarily in dividends. These individuals will be hit twice by this rise, with increased NI contributions also reducing the profits from which dividends are paid.

Luke Davis, CEO of IW Capital said: "These tax rises seem to disproportionately affect the small business owners and entrepreneurs that are currently at the forefront of the UK's economic recovery. We know that pre pandemic, small firms were hiring at a rate three times higher than that of larger rivals, and with over 800,000 new businesses started in 2020 alone this trend looks set to continue.

"Business owners and the self-employed were also among the least financially supported during the various lockdown periods in the last 18 months. On top of this were know that it was, in many cases, small businesses that suffered most from breaks in trading.

"What we should be doing is supporting the entrepreneurs of the UK, who, with their ambition and innovation are always chasing growth no matter the circumstances. We have seen in the past how much a small reduction in tax can impact this sector with the Enterprise Investment Scheme as a great example. In 2011 when Income Tax reliefs went from 20 per cent to 30 per cent the amount of investment into SMEs almost doubled and it is estimated that each pound of tax relief resulted in three more paid in eventual taxes - a great return on investment."

Short sighted
Contractor tax experts, Qdos claimed this was a short-sighted attack - and again the smallest businesses were in the firing line.

Seb Maley, Qdos said: “This is another short-sighted attack from the Government on the self-employed. Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves - people who have arguably been hit the hardest by the pandemic.

"Once again, it seems that the smallest businesses are bearing the brunt of tax reform. Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the government needs most to speed up the economic recovery.

“The national insurance tax hike will hit employers too, pushing up the costs of hiring workers on the payroll. It goes without saying that this could stifle employment growth. With this in mind, businesses that have needlessly forced their contractor workforce inside IR35 or insisted they work PAYE in response to IR35 reform should rethink this decision immediately.”

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Susie Hughes © Shout99 2021

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