With corporation tax rates now established at a decade high rate of 25% and top personal income tax rates at 45%, HMRC can now benefit significantly more than business owners themselves from every £1 of profits distributed. Whether paid in the form of dividends (54.52%) or bonus (53.43%), the striking effective overall tax rates arguably do little to encourage business ambition and entrepreneurial activity.
Back in 2010, when the top rate of personal income tax was raised to 50%, economists and policy advisers raised concerns about the 50% threshold representing a psychological barrier to effort, with a serious knock-on impact on economic growth. Whether those concerns translated into changed behaviours, or whether the impact remains rather more abstract (linked as far back as equilibrium points on Arthur Laffer’s famous economic curve) is undetermined – the 50% rate lasted little over 2 years.
For those in control of their businesses, as well as their incomes, those behaviours may be more pronounced. We are already seeing signs that the current combined tax rates are prompting thought/behavioural change amongst successful private business owners, such as:
- A stronger appetite for tax planning
- Looking at alternatives to dividends or salary
- Introduction of family members as shareholders
- Acceleration of business succession decisions
- Stronger questioning of public sector service/spending
- Reducing discretionary ‘supportive’ spend, such as charitable donations and sponsorship
Of course, no two mindsets are the same, but the above are cropping up in conversation more and more. Our ability to combine expert knowledge on these things, along with real commercial appreciation and empathy, means that we actually get it. To discuss all things tax, get in touch with one of our expert team.
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