Does the Government Care about Small Business Owners?22nd March 2017
By now you’ll have heard the screeching tyres and smelled the burning rubber all the way from Downing Street, following Philip Hammond’s spectacular U-turn on plans to increase National Insurance contributions for the self-employed.
Half the media attention focused on the fact he broke a Conservative manifesto pledge.
I don’t know much about that; I’m not a political creature. The other half seemed to claim the U-turn as a victory for the small business owner.
Not if you look at the bigger picture.
If you ask me, the commentators have all missed a much bigger issue: What is the government actually doing for entrepreneurs?
Now, I know that this isn’t my usual blog topic, but please bear with me.
When I think of small business owners, one word comes to mind: Risk. These good people take on a huge personal risk financially, and even physically and mentally. Setting up and running a business involves huge amounts of work, and the stress can be debilitating.
Yet SMEs are the backbone of our economy. We need entrepreneurs to create jobs and shoulder risks in order to create a productive and diverse financial ecosystem.
We’d be sunk without them.
So what does the Government offer as incentive to start a business? ...Very little.
The biggest tax incentive you get is Entrepreneurs Relief, a concession where the first £10 million of gains is taxed at only 10% (rather than the normal potential 28%).
That’s all well and good when you’ve slogged for 20 or 30 years - possibly longer - and can look forward to giving the Government “only” 10%!
Day-to-day, however? You get very little.
A long-standing client of ours has run a successful business for many years. Thanks to some careful tax planning, he has now built up huge cash reserves. If he was to withdraw them, he’d be paying up to 50% in tax. If he waits and sells the business, he would only pay 10%. In the meantime, the cash is losing real value, gaining only a small amount of interest.
It makes no sense.
If you own a Limited company, on the other hand, you can pay yourself in dividends rather than salary. In effect, you’re compensating yourself as an investor. Quite above board if the circumstances are right, and you save yourself up to 25.8% on National Insurance.
Last year, everything changed. The Chancellor changed the whole structure of the tax on dividends from a system which actually gave you a reasonable advantage to one where only your first £5,000 of dividends is taxed at zero percent. After that, you pay more tax than you did before. From April 2018, this zero-percent band plummets to £2,000.
Isn’t it clear the Government is not rewarding the hard-working entrepreneur? Do they really care?
Entrepreneurs deserve a clear allowance, concession or benefit to compensate them for risking their all to build businesses which create jobs and benefit the economy.
In reality, Westminster pays lip service to our small business owners, but it needs to wake up to the very real challenges these stalwarts of our economy face on a daily basis.
As for the media, they need to stop tallying all their petty political victories and losses, and focus on the bigger challenge here:
How do we encourage people to start businesses, instead of punishing them?
Rant over… But I’d love to hear your opinion too. Please do let me know whether or not you agree.