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Tax & Cost rise – Time to adjust your business plans?

Posted on 4 November 2021

Tax rise, inflation, minimum wage rise – what small businesses need to consider to adjust their next three years’ business plans.

Small business owners in the UK could be forgiven for thinking they are facing something of an impending ‘triple whammy’, especially after hearing the recent Budget speech. Here we look at three of the main areas of concern and explain their possible implications.

    1. The increase in dividend tax rates 

From April 2022, tax rates on dividend income will increase by 1.25% for all three tax bands. Alongside the 1.25% increase in National Insurance contributions, the Government will use the additional tax revenue to fund spending on the NHS and social care.

This means that:

• A basic rate income taxpayer currently pays 7.5% tax on any dividend income that exceeds the dividend allowance of £2,000 per annum. From April 2022, this tax rate will increase to 8.75%
• The higher dividend tax rate is 32.5% at present, and this will increase to 33.75% next year
• The current additional dividend tax rate is 38.1%, rising to 39.35% in the 2022/23 tax year

Smaller businesses are, of course, managed by their shareholder/s in most cases, meaning that people who run small businesses often regard dividend income as a form of remuneration. The amount of their dividend income they can keep for themselves will reduce once these increases come into force.

Corporation Tax rate increase from 2024

Dividends can only be given from the company’s after tax profit. From 1^st of Apr 2024 the corporation tax rate is also going up to 25% (previously 19%) for companies with profits over £250k. Businesses with profits up to £50,000 will be taxed at 19%. There is a taper calculation for profits between £50,000 and £250,000.

 

   2. The rise in the minimum wage 

 What the Government calls the National Living Wage is in fact a minimum wage that all employees are entitled to receive.

The Government has announced that the Living Wage will increase by significantly more than the rate of inflation from April 2022:

• The minimum hourly rate for those aged 23 and over will increase by 6.6% from £8.91 to £9.50
• The minimum salary for employees aged 21 and 22 will rise by 9.8% from £8.36 to £9.18
• The rate for people in the 18-20 age group will go up by 4.1% from £6.56 to £6.83
• The Living Wage for 16 and 17-year-olds will increase by 4.1% from £4.62 to £4.81
• The rate for any apprentices who are under 19 and/or in the first year of an apprenticeship is set to go up by 11.8% from £4.30 to £4.81

Whilst these increases might be welcomed by the employees, any business that employs a number of staff at the Living Wage could therefore see their wage bill rise significantly next year.

Also, businesses would be under pressure to increase wages for other employees too whose income previously was above the minimum wage but now will be at or close to minimum wage.

 

   3. Predictions of rising inflation 

 The increases to dividend tax and the Living Wage will come into force in April 2022. It’s also very possible that the rate of inflation will reach its peak around this time as well.  At the time of writing, the Consumer Price Index rate of inflation is 3.1%. The Government’s official prediction, made in the Budget speech, is that this rate will rise to 4.4% during 2022, and will average 4% during the year. The Office for Budget Responsibility is warning that, as a worst-case scenario, the CPI rate could hit 5%.

Rising inflation can have a number of adverse effects for businesses, including:

• It costs more for the business to purchase products and raw materials
• The spending power of anything the business owners take as salary and/or dividends is reduced
• It leads to an increase in many business expenses – there might be particular concern about energy costs at present
• If the spending power of the UK population reduces, then it can be harder to sell the business’s goods and services
• The business might come under pressure to offer larger salary increases to employees to keep pace with inflation

The wider picture 

This of course all comes as many businesses are still struggling to recover from the financial effects of Covid-19. The biggest concerns might be for:

• Businesses that were making small losses, but which were expecting to become profitable soon – now they might be looking at continuing to make a loss
• Business with low profit margins – the additional costs might cause them to start losing money

Recommendations for coping with the changes

 There are, however, be a number of things businesses can do to alleviate the effects of these changes. Examples include:

1. Examining the potential to scale up the business’s operations. Perhaps with new marketing or even merger.
2. Looking at whether it is possible to increase prices without losing excessive numbers of customers. Is it possible to introduce any price rises gradually?
3. Considering repackaging their services – for example grade your services to low priced and premium service. Hopefully, any customers feeling the pinch will make use of the new, more basic offering and the business can remain profitable
4. Find more efficient processes to reduce time and increase productivity
5. Considering if the business could operate with smaller premises, especially given that modern technology can make remote working straightforward

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