Yesterday, 22nd June, chancellor George Osborne announced the much-anticipated new Budget. The cuts and new tax regulations appear to be beneficial on the whole for UK businesses, but not so much for the UK entrepreneur. The small business sector is also expected to benefit by a good number of the changes, especially micro-businesses with up to 10 employees based outside London. However, the VAT rise to 20% is particularly harsh on small businesses as the majority is expected to struggle for the cash resources to meet this rise.
Key changes are as follows:
- As of January 4th, 2011, the VAT will be raised from 17.5% on goods and services to 20%.
- Personal taxation was left at 18% on non-business assets for anyone paying the basic rate of income tax (20%) but raised to 28% for those who pay higher rates. However, the current 10% CGT rate has been extended to cover the first £5m of lifetime gains, up from £2m, after which the 28% rate will be applied.
- The main corporation tax would be lowered by 1% each year from 28% to 24% by 2014-15.
- Small companies tax will fall to 20%. This is expected to benefit up to 850,000 small businesses.
- New firms set up outside London, the South East and the East of England will be let off employer NIC (National Insurance Contributions), up to £5,000 for each of the first 10 employees.
- The enterprise guarantee scheme is to be applied to small businesses in order to improve access to credit (expected to benefit 2,000 small businesses).
- The threshold at which employers start to pay NIC will rise by £21 per week as of April 2011.
It follows from the above that it is now more advisable for entrepreneurs to register as limited companies instead of sole traders. A small company making a profit of £100,000, for example, will pay a corporation tax of £20,000, corresponding to 20% according to the new rules, but a sole trader making the same amount will end up paying £40,000 (40% – assuming that his/her total income is in the top bracket), and a NIC of £1000.
