The latest chancellor makes entrepreneurs a book-balancing tax scapegoat, for now

01 October 2022

In an unprecedented few weeks in politics, ‘U-turn’ has become the political buzz word. Only three weeks ago Kwasi Kwarteng made a striking not-so-mini-budget announcement which left politics and markets in turmoil, now almost all of that has been ditched by the new chancellor Jeremy Hunt. While some taxes clearly have to be raised to avoid increasing government debt, this week it seems business owners are the target.

The basic rate of income tax will now remain at 20% indefinitely, instead of being reduced to 19% from April 2023. When originally announced, this was a bold statement of the government’s commitment to tax cutting. The 19% rate, representing a saving of £175 a year for the average taxpayer, was initially set to apply from April 2024 when announced by former chancellor Rishi Sunak in March 2022, before Kwasi Kwarteng announced the acceleration to April 2023 last month.

Now corporation tax is once again set to increase to 25%, and dividend tax rates will miss out on the cancellation of the Health and Social Care levy reversal applying to earnings. Dividends will remain subject to the previously announced 1.25% increase, keeping the higher and additional rates of tax on dividends at 33.75% and 39.35% respectively.

All of this means that an individual running their business through a company will not benefit from tax cuts after all. Instead, entrepreneurs face higher corporation tax and higher income tax on earnings and dividends than was announced just weeks ago and might be forgiven for scoffing at the government’s vision for a lower tax economy.

Just last week the government restated their commitment to lowering taxes, including the reversal to the 1.25% increase in dividend tax to “drive growth and investment”. The constant frustration of flip-flopping tax policy calls into question the government’s growth agenda if entrepreneurs cannot plan ahead by more than a week at a time.

Boris Johnson previously commented that the increase to dividend tax rates will ask better-off business owners and investors to make a fair contribution too. Yet this statement rests on what, in the current economic environment, might be a false assumption or generalisation; that individuals who choose to run their businesses through a corporate structure are better off than those individuals running a sole trade business.

Whilst changes to tax policy have been necessary to ease the markets, such huge swings in direction on economic and tax policy makes it very difficult for business owners to plan ahead appropriately. The risk to the Treasury from keeping dividend tax rates high is that business owners could sit on their hands. Entrepreneurs may simply leave profits in their companies and look to wait and see what will happen longer-term on personal tax rates rather than pay out dividends now.

Similarly, key decisions such as the appropriate structure for their business, for example should they set up as a sole-trader or in a company, are likely to be deferred until there is some semblance of stability. In time, business owners will be hoping that the chancellor can turn his hand back to introducing tax policies that might help drive business growth and put away the fire extinguisher.

We now watch with bated breath ahead of the economic plan announcements on 31 October. During a time of rocketing inflation and a looming recession, and with higher taxes already on the table, it’s just a matter of what is next?