Small firms vital to Covid bounce back as tax rises are set to slow economic recovery

Boris Johnson yesterday announced an increase on national insurance contributions for both employees and employers alongside a rise in dividend taxes ahead of a new Health and Social Care Tax. The increases are predicted to raise £36billion over the next three years, with much of it going toward clearing the NHS backlog created by the pandemic.

National insurance contributions will rise by 1.25 percentage points for both employers and employees – resulting in higher costs for businesses and lower take home pay for workers. The 1.25 percentage point rise in dividend tax will take the tax rate to 33% rate for higher rate taxpayers, but while it may be assumed that this will mostly apply to rich investors, in reality it will likely hit small business owners hardest.

There are currently over 6 million SMEs in the UK employing 16.8 million people, many of whose founders and directors are paid primarily in dividends. These individuals will be hit twice by this rise, with increased NI contributions also reducing the profits from which dividends are paid.

These tax rises seem to disproportionately affect the small business owners and entrepreneurs that are currently at the forefront of the UK’s economic recovery. We know that pre pandemic, small firms were hiring at a rate three times higher than that of larger rivals, and with over 800,000 new businesses started in 2020 alone this trend looks set to continue.

Business owners and the self-employed were also among the least financially supported during the various lockdown periods in the last 18 months. On top of this were know that it was, in many cases, small businesses that suffered most from breaks in trading.

Albeit economic recovery and support for the NHS is a critical requirement as we recover from the last 18 months, it is vital in equal measure to ensure the backbone of our route to private sector prosperity is safeguarded. Specifically, to ensure the entrepreneurs and supporting teams leading the charge, feel incentivised to grow and scale the businesses of a pandemic free future.  With an evidenced rise in community focused investment and the significant increase in the number of businesses started during the pandemic – over 800,000 in 2020 alone – local economies up and down the country will benefit heavily from private investors rallying around the founders that have served their communities through the pandemic and beyond.

To find out more about IW Capital, or for more information on investment and non-executive opportunities, please speak to a member of the IW Capital team today on 020 7015 2250, or email info@iwcapital.co.uk