"The Chancellor made it clear that the focus for the first Conservative Budget in 20 years was to establish a thriving business environment for those with ambition. Whilst the UK’s army of SMEs were certainly a feature in the Chancellor's proposed plans, many small business owners could find themselves hit hard by the changes to the dividend tax credit regime.
“Small business owners with incorporated companies will often pay themselves a combination of dividends and salary. One of today’s major announcements sees dividend tax credits replaced by a tax-free allowance of £5,000 of dividend income. Beyond this, the rates of dividend tax will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
“This measure could be a blow for those thousands of small business owners paying themselves considerable amounts in dividends, for example, if an owner makes £55k a year of which £30k is salary and £25k is dividend, the increase in tax under the new measure will be just over £1,600.
Bivek Sharma added: “Small business owners paying employees the minimum wage will also have to calculate the impact of the increase in salary cost for the new national Living Wage. Those SMEs operating in sectors with a high proportion of low-paid employees could well find themselves out of pocket.”
Bivek Sharma concluded, “Of course, there was some good news in the Chancellor’s red book for the UK’s entrepreneurs. The reduction to corporation tax will be wholeheartedly welcomed, helping build on growing confidence and providing that essential breathing space for growth.
“Additionally, the increase in the NIC threshold to £3,000 will be an incentive for small businesses to take on more staff, while the fixing of the Annual Investment Allowance at £200,000 creates greater certainty and stimulus for investment.
“However, all of these positive moves could be overshadowed in the minds of small business owners by the overhaul to the dividend tax regime.”
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Katy Broomhead, KPMG Corporate Communications
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.