Anyone else sick of the general election campaign yet? Whatever your political views in general, there’s clear daylight between Labour and the Conservatives on how they will treat small businesses. As we are in the gap between Small Business Saturday in the US (30th November) and the UK (7th December), I thought I’d summarise the impact on UK small businesses.
Corporation tax is currently 19% in the UK and was scheduled to decrease to 17% by 2022/3. Boris Johnson has said this is unaffordable for now so it will stay the same. Labour will revert Corporation tax to the 26% level it was at during the last Labour Government by 2023. This will include an immediate rise to 21% . There is a small profits rate of 19% rising to 21% but this only impacts firms with less than £300k per annum revenue and much smaller profits. This will lead to a cliff edge at £300,001 revenue. The Lib Dems are proposing a more modest 1% raise to 20%.
Taxation on dividends
Labour propose to tax dividends at the same rates as income tax. This means a huge hike from 7.5% to 20% tax on dividends taxed at basic rate. With the tax free allowance dropping to £500 from the current £2,000 per annum, this will massively reduce income for many small business owners. Why does this matter? The use of dividends is one of the few opportunities small business owners have to reward the risk they take by operating their business. Penalising small business owners by making them pay income tax (on top of increased Corporation tax) will lead to small business owners paying more tax than employees.
The below table illustrates the difference small business owners will see under a Labour Government.
Entrepreneurs tax relief
Currently Entrepreneurs tax relief means small business owners would pay 10% on selling their business. Under plans announced by the Labour party, CGT would be aligned to income tax. This could mean a 45% or even 50% tax take when a business is sold.
Both the Conservative and Labour parties are proposing to increase the minimum wage. Labour want to increase the minimum wage to £10 per hour for over 16’s. Will this lead to more 16 year olds being unemployed? If a small business owner can employ a 30 year old with experience over a 16 year old straight from school for the same salary, who will they chose?
Our analysis for small business owners
From a purely financial perspective, Labour’s manifesto will cause small business owners serious concern. Given there are 5.7 million SME’s in the UK, this will impact the income of many UK employers. Most of these aren’t drawing large salaries so it is seems strange to us that Labour want to punish the backbone of the UK economy to such a degree.
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