Tax blow for entrepreneurs in the Spring Budget

Business owners and self-employed people are facing an increase in their tax bills following the Spring Budget, experts from leading South West law firm Stephens Scown LLP are warning.

Chancellor Philip Hammond announced on Wednesday that the tax-free dividend allowance will be cut from £5,000 to £2,000 from April next year. The measure will affect many business owners, as well as investors.

The Chancellor also revealed that the main rate of National Insurance contributions (NICs) for the self-employed will increase.

But there was some relief for companies facing sharp increases in their business rates.

Tax changes

Malcolm Emery, private wealth partner at Stephens Scown, said: “The reduction in the tax-free dividend allowance will be quite emotive and is very relevant for the South West economy.

“This came as a surprise, particularly as the allowance was only introduced in April last year. It will affect a lot of family-owned companies in the South West.

“Dividends above the tax-free threshold will be taxed at their marginal rate, so if the shareholder is a higher rate taxpayer this change will cost them up to £1,200 a year.

“I think this is a little unfair because the vast majority of people who use companies are entrepreneurs. We have to remember what they bring to the economy in terms of jobs and wealth creation by taking risks to start and grow their businesses.”

National Insurance

From April next year, Class 4 NICs for the self-employed will rise from nine to 10 per cent. At the same time, Class 2 NICs will be abolished, as previously announced.

Mr Hammond announced that Class 4 NICs – currently paid on profits between £8,060 and £43,000 - will rise further, to 11 per cent, in April 2019.

The changes mean self-employed people with profits over £16,250 will pay more in National Insurance.

Malcolm said: “The difference between National Insurance contributions for employed and self-employed people has always been a bone of contention, when everybody uses the same public services.

“This increase was always likely to happen, particularly with Class 2 NICs due to be abolished. I suspect there will be further increases to come, as the Chancellor has made it clear he regards the disparity between the self-employed and employees as unfair.”

As expected, the Chancellor also announced a package of measures to support companies affected by the business rates revaluation, including a £300million fund for local authorities to provide discretionary relief to those hardest hit.

Malcolm said: “This is a welcome move, though I suspect it will not make a material difference for most businesses.

“We know a lot of businesses are facing steep increases in their rates, particularly in Cornwall, so we hope the South West will receive its fair share of this funding to help those worst affected.”

Funding for innovation

The Chancellor also announced a package of measures aimed at increasing productivity – historically a major issue for the South West economy.

These included £270million to launch the Industrial Strategy Challenge Fund, which will support research and innovation in areas ranging from artificial intelligence and robotics to better batteries for electric vehicles and improved medicine manufacturing.

Meanwhile, the Government is to invest £200million in local projects to build fast and reliable full-fibre broadband networks, and £16million for a national 5G Innovation Network to trial new 5G technology.

Ben Travers, partner and head of intellectual property and IT at Stephens Scown, said: “We work with a lot of businesses who are developing innovative technologies, helping them to protect their intellectual property.

“Exeter, in particular, is home to a lot of cutting edge companies, so we hope businesses and universities in the South West will be able to take advantage of this funding for research and innovation.

“The reduction in administrative burdens for firms claiming R&D tax credits was also a welcome announcement by the Chancellor.”