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05 April 2018

New tax year means higher pension costs and lost reliefs for small firms

From tomorrow, the minimum employer contribution to auto-enrolment saving schemes will rise from 1% of pensionable pay to 2%.

At the same time, four million entrepreneurs will find themselves £150 worse off because of a delay to the scrapping of Class II National Insurance Contributions (NICs). The levy was set to be dropped when the new tax year starts tomorrow, but the move has been shelved temporarily.

Other changes taking effect tomorrow include a reduction in the dividend allowance to £2,000 (from £5,000 in 2016/17), a doubling of the Enterprise Investment Scheme (EIS) limit to £2 million and continuation of a Making Tax Digital (MTD) trial among the self-employed.

The turnover threshold for Value Added Tax (VAT) registration has been frozen at £85,000 until 2020.

Federation of Small Businesses (FSB) National Chairman Mike Cherry said:

“The doubling of auto-enrolment employer contributions will hit the very smallest firms and start-ups the hardest. Many have only set up auto-enrolment schemes in the past few months. Small businesses in labour-intensive industries such as retail, construction and childcare will feel the impact of this rise most acutely. These sectors are already beset by high inflation and skills shortages.

“Small business owners want to see employees save, but more needs to be done to help firms absorb high labour costs. That starts with increasing the Employment Allowance to £4,000. At the same time, new incentives need to be put in place to encourage the self-employed, who miss out on auto-enrolment, to save for the future.

“Four million self-employed entrepreneurs were promised a £150 tax cut from today thanks to the abolition of Class II NICs. Sadly, that promise hasn’t manifested. The self-employed miss out on many social security benefits, like auto-enrolment, that employees enjoy. That should be recognised by HMRC. Class II NICs need to be shelved next year without any more excuses.

“A 60% drop in the dividend allowance over the last two years will disincentivise entrepreneurship all over the country. Higher rate tax payers will lose out to the tune of £1,000 annually. If we want more people to strike out on their own, risk needs to be sufficiently rewarded.

“An increase in the EIS investment limit is good to see. To date, take-up of the scheme has been held back by low awareness: two thirds of small businesses haven’t heard of it. This is symptomatic of a wider lack of understanding around equity finance: six in ten small firms don’t know what it is. That needs to change. More small firms should be made aware that equity investment can bring with it expertise and support, without the burden of debt.

“Along with the smallest firms, the self-employed now have the option to take part in MTD on a voluntary basis. This voluntary approach should continue for the foreseeable future, allowing time for thorough user-testing and providing space for success stories to emerge.

“It was good to see the Chancellor respond directly to our calls for a VAT threshold freeze in the autumn. VAT is the most time-consuming tax for our members to manage, with registered small firms spending a working week every year complying with VAT obligations on average.

“There is an issue with firms approaching the £85,000 threshold and putting the brakes on. Resolving that lies in a smoothing mechanism though, not in suddenly dragging more firms into the burdensome VAT regime.”