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NI and dividend tax hike may hit small business owners hard

  • 08/09/2021
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A small business investor has warned with small to medium businesses (SMEs) employing 61 per cent of workers, the 1.25 per cent rise in National Insurance for employees and employers will both hit small firms hard and hamper economic recovery.


There are currently over six million SMEs in the UK employing 16.8m 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, said Luke Davis, CEO of IW Capital.

The 1.25 per cent rise in dividend tax will take the tax rate to 33 per cent rate for higher rate taxpayers, said Davis.

The tax hike due in April 2022 was announced by the prime minister yesterday alongside a rise in dividend taxes, which will drop back to today’s rate after a year, ahead of a new health and social care tax on earned income to be levied from 2023.

The increases are predicted to raise £36bn over the next three years and intended to help clear the NHS backlog created by the pandemic and contribute to social care costs.


Costs for workers

Government data suggests those on £20,000 will contribute a further £130 a year on top of the £1,251 already contributed and higher earners on £100,000, who already contribute NI of £5,878, will pay another £1,130 annually. Those earning under £9,564 will be exempt.

Luke Davis, CEO of IW Capital said: “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,” he said.

“What we should be doing is supporting the entrepreneurs of the UK, who, with their ambition and innovation are always chasing growth no matter the circumstances.”

Critics have widely slammed the choice of National Insurance as the vehicle for the tax rise, if not the need for it.

Business commentators have hit back as well as the Resolution Foundation, a think tank with a focus on those with lower incomes, which concluded the tax is generationally unfair as the bulk of the tax will come from working age people and ‘prioritises rich landlords over their tenants’.

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