A leading small business organisation has raised concerns that the Chancellor may be considering yet another dividend tax hike in the coming months.
The Federation of Small Businesses (FSB) suggests that Philip Hammond may target a further tax grab by abolishing the dividend allowance in the Autumn Budget.
Mike Cherry, chairman of the FSB, points out that small businesses have already suffered a 60% cut in the allowance – when it was slashed from £5,000 to £2,000 from April 2018 onwards.
The business organisation estimates that the Treasury could raise £1.3bn per year from the abolition, in addition to the £2.6bn raised by reducing the allowance last year. Or a further £1,000 cut could raise £600m.
Dividend tax – a soft target
With the looming fallout from the IR35 private sector consultation on everyone’s minds, it is easy to forget the cost limited company owners and shareholders have had to bear as a result of changes to the way dividends have been taxed since April 2016 onwards.
The April 2016 dividend tax hike – where the old system of tax credits was replaced by a new set of fixed tax bands – represented a massive increase in the tax burden for contractors and other small company owners. A typical contractor now pays over £3,000 more per year as a result.
The so-called ‘dividend allowance’ is actually a zero rate tax band just for dividend income, and it forms part of the existing tax band(s) within which a person’s dividends fall. It is not provided in addition to the existing tax bands.
Nevertheless, it did represent something of a concession when introduced in April 2016. However, the allowance cut from £5,000 to £2,000 a mere 2 years later will cost higher-rate taxpayers almost £1,000 each year.
Dividends represent an easy target for the Chancellor, as complaints by business owners and shareholders are unlikely to gain any public sympathy, and such tax hikes are relatively easy to administer via the self-assessment process.
Don’t hit small firms with a “secret tax grab”
Mike Cherry told us: “From IR35 changes in the public sector, to a bruising business revaluation, to cuts in the Dividend Allowance, small firms and the self-employed have been saddled with a multitude of new burdens in recent years.
“We need more people striking out on their own if we want an economy that’s flexible, adaptable and innovative. Reducing the Dividend Allowance even further would give them one less reason to do so.
“We need to back small businesses and their shareholders – not clobber them with a secret tax grab.”
Further targets to pay for NHS spending commitments
Despite the UK recording its biggest July surplus since the turn of the century, the Chancellor is likely to seek new ways to raise funds to pay for a £20bn/year cash injection for the NHS by 2023/24.
Another target could be tax relief on pensions, according to a recent press report.
The Daily Mail claims that tax relief on pensions costs the Treasury up to £38bn each year – “one of the last remaining pots of gold we can raid”, according to an unnamed Government spokesperson.
However, it is worth remembering that pension reforms are always first on the list when pre-budget predictions are drawn up.
The Guardian has also published the views of the Resolution Foundation, which has urged the Chancellor to abolish Entrepreneurs Relief in the forthcoming Budget, “generating annual savings of around £2.7bn that could be spent on the health service.”