Rishi Sunak’s Dividend Tax Hike: A Blow to Britain’s Small Business Owners
As the cost-of-living crisis continues to squeeze households across the United Kingdom, the government led by Prime Minister Rishi Sunak has made a controversial move that is set to pile further financial pressure onto the nation’s hard-working small business owners. In a decision that has sparked widespread outcry, the Treasury has announced plans to drastically lower the tax-free dividend allowance, a move that experts warn could stifle entrepreneurship, hamper economic growth, and unfairly penalise those who have taken significant risks to build their own companies (Partington, 2022).
The Dividend Tax Overhaul: What’s Changing?
For years, the dividend allowance has provided a vital lifeline for small business proprietors, allowing them to extract a portion of their company’s profits as dividends without incurring any additional tax liabilities. However, under the new rules came into effect in April 2024, this tax-free allowance will be slashed from £1,000 for the 2023/24 tax year, to just £500 (HM Revenue & Customs, 2022).
The table below identifies how this has been declining.
Date Allowance
6 April 2024 to 5 April 2025 £500
6 April 2023 to 5 April 2024 £1,000
6 April 2018 to 5 April 2023 £2,000
6 April 2016 to 5 April 2018 £5,000
Prior to 2016 the basic rate was 0% on dividends at the basic rate
To put this into perspective, if you paid the dividend as a wage, you would be paying 28%, this is 20% income tax and 8% National Insurance contributions. With this threshold being lowered, after the first £500 you will be paying 27.75%, this is 19% Corporation Tax and 8.75% Dividend Tax. WOW. For all your hard work and aiding the economy, you can have a £500 bonus, which has already had 19% removed, then it might as well be income tax as you only save £2.50 every £1,000.
The Conservative Party’s 2015 manifesto outlined several policies designed to support small businesses in the United Kingdom. However, nearly a decade later, the current government’s tax policies appear to be reversing that support for entrepreneurs and small business owners, bending them over and taking back the support anally, oops, I mean annually.
This shafting, another typo, this shift in tax policies raises concerns about the government’s commitment to supporting the small business sector, which plays a vital role in driving economic growth and job creation in the UK.
The Impact on Small Businesses: A Devastating Blow
For countless entrepreneurs across the UK, the ability to extract dividends from their companies in a tax-efficient manner has been a crucial factor in sustaining their businesses and supporting their families. By slashing the dividend allowance, the government is effectively increasing the tax burden on these hard-working individuals, many of whom have already endured immense challenges throughout the COVID-19 pandemic and the subsequent economic turmoil.
Mike Cherry, the National Chair of the Federation of Small Businesses (FSB), has been among the most vocal critics of the dividend tax hike, warning that it could “punish entrepreneurial investment and risk-taking” (FSB, 2022). In a scathing statement, Cherry criticised the government’s decision, stating that “this move will hurt hundreds of thousands of small business owners who rely on dividend income to cover personal costs like mortgages and bills” (FSB, 2022).
The FSB’s concerns are echoed by countless small business owners across the country, who fear that the increased tax burden could force them to make difficult choices, such as cutting back on investment, reducing staff numbers, or even closing their doors entirely.
Double Taxation: The Unfair Burden on Small Businesses
One of the most contentious aspects of the dividend tax overhaul is the fact that it effectively subjects small business owners to double taxation. Unlike larger corporations, which can often exploit various loopholes and tax avoidance strategies, small businesses are already required to pay corporation tax on their profits before any dividends are distributed. By then imposing additional taxes on those dividends, the government is essentially taxing the same income twice, creating an uneven playing field and disproportionately penalising the very entrepreneurs who are the backbone of the UK’s economy.
This is a fivefold curse of tax increases for those who took on the risk of branching out on their own, having paid tax on the income they invested to start their business, paid tax on profits, paid tax on salaries, and now face higher dividend taxes. It is looking like the Conservatives do not want the small business owners vote in the general elections this July 2024.
The Ripple Effect: Stifling Entrepreneurship and Economic Growth
Beyond the immediate financial impact on small business owners, the dividend tax hike could have far-reaching consequences for the UK’s entrepreneurial ecosystem and overall economic prosperity. By making it more difficult for entrepreneurs to reap the rewards of their hard work and risk-taking, the government risks discouraging individuals from starting new businesses or investing in existing ones (Partington, 2022).
This could lead to a slowdown in innovation, job creation, and economic growth, precisely at a time when the UK needs to be fostering an environment that encourages entrepreneurship and supports the growth of small and medium-sized enterprises (SMEs) (Institute of Directors, 2022).
Moreover, the dividend tax overhaul could incentivise small business owners to explore alternative strategies for extracting profits from their companies, potentially leading to increased complexity, higher administrative costs, and a greater risk of inadvertent non-compliance with tax regulations (Partington, 2022).
A Call for Reconsideration and Support
As the backlash against the dividend tax hike continues to mount, small business advocates and industry bodies are calling on the government to reconsider its stance and provide much-needed support to the nation’s entrepreneurs.
The FSB, for instance, has urged the Treasury to reinstate the £2,000 dividend allowance and introduce targeted measures to support small businesses, such as increasing the Employment Allowance and extending the Annual Investment Allowance (FSB, 2022).
Other organisations, such as the Institute of Directors (IoD), have echoed similar sentiments, with the IoD’s Chief Economist, Kitty Ussher, stating that “the government should be looking to support entrepreneurship and investment, not undermine it” (Institute of Directors, 2022).
A Time for Action and Support
The decision to slash the dividend allowance has sent shockwaves through the UK’s small business community, with many entrepreneurs and self-employed professionals feeling unfairly targeted and disillusioned by the government’s actions. While the stated goal of the policy may be to raise additional revenue and promote tax fairness, the reality is that it risks stifling entrepreneurship, hampering economic growth, and placing an undue burden on the very individuals who have taken significant risks to build their own businesses (Partington, 2022).
As the nation navigates these challenging times, it is imperative that the government recognises the vital role played by small businesses in driving innovation, creating jobs, and contributing to the overall prosperity of the UK (Institute of Directors, 2022). By reconsidering the dividend tax hike and implementing targeted measures to support entrepreneurs, the government can demonstrate its commitment to fostering an environment that encourages risk-taking, rewards hard work, and enables small businesses to thrive.
In the words of Mike Cherry, ” We need to back small businesses and their shareholders – not clobber them with a secret tax grab” (FSB, 2022). It is time for the government to heed these calls and take decisive action to ensure that the nation’s entrepreneurial spirit remains strong, resilient, and well-positioned to drive the UK’s economic recovery and long-term growth.