Small-to-medium sized businesses (SME’s) have been through a lot in the past 18 months.  First Brexit, then a global pandemic followed by a driver shortage and now a national insurance hike of 1.25 percent as of April 2022 has left many SME’s gasping for breath.  In order to keep costs down, a number of small businesses that have previously had physical premises have had to move online, cut jobs or simply close their doors for good.  With the Prime Minister’s announcement earlier this month, it may lead to yet another tightening of belts for the small business community.

Does My Business Qualify As An SME?

Broadly speaking, an SME is defined as a business that employs less than 250 people.  Micro enterprises employ fewer than ten people, small enterprises between 10 and 49, and medium enterprises from 50 to 249.  According to statistics from the Federation of Small Businesses, SME’s account for 99.9% of the business population.

Which Tax Class Is My Business In?

This depends on the amount which you, or your company, earn, and which tax class you fall into. Those who are self-employed and earn profits of £9569 or over per year fall into Class 4.  If you pay voluntary contributions – this means you’re self-employed and earn less than £6515 per year – you fall into Class 3. For those who are self-employed and earn £6515 or more per year, you are in Class 2.  Employees who earn more than £184 per week and are under the state pension age (currently 66 for both men and women) automatically have national insurance contributions deducted by the employer.

Where Is My Tax Going?

The Prime Minister announced earlier this month that the April 2022 tax rise would be used to pay for and support the NHS and social care in the aftermath of the height of the pandemic.  This has been named the new Social Care and Health Levy.  The 1.25% rise in contributions is expected to raise up to £12 billion per year.   Traditionally, national insurance is used to help fund state benefits such as jobseeker’s allowance, maternity allowance, the basic, additional and new state pensions, bereavement support allowance and employment and support allowance.

Dividend Tax Increase

Unfortunately for small businesses, the tax increase doesn’t end with national insurance. Dividend tax will also be increasing by 1.25% to match the national insurance rise.  If you own a share in a business, you may get a dividend payment.  Some of this can be earned each year without being taxed – up to £2000 – known as the dividend allowance.

If you are a Basic Rate Taxpayer, the dividend tax will increase to 8.75%.  If you are a Higher Rate taxpayer, you will be paying a rate of 33.75% on your dividend payments. If you are an Additional Rate taxpayer, you will now be paying 39.35% on your dividends.

Why Now?

Much has been made amongst the small business community about the poor timing when it comes to these increases. However, it is possible that the government is bracing itself for another ‘winter of discontent’ as Covid-19 case numbers and deaths steadily start to rise again, even though the UK seems to have conquered the worst of it. Speculatively, it’s possible that the tax increases in 2022 will be used to balance the books with the NHS and social care should there be another crisis.

Where Can I Find Out More?

All the information on the national insurance increase and the dividend tax increase can be found on the website.  If you require any assistance with your business accounting, income tax or VAT returns, contact us today – we are here to help.  You can call us on 01594 842 188 or email us at [email protected].