If we want more entrepreneurs we should tax them less
Altogether, from the very first penny received from an employer to the very last penny passed down to one’s children, the tax on entrepreneurship can get up to 93.1 per cent, says John O’Connell
In a speech she gave in January, the Chancellor declared that it is “businesses, investors and entrepreneurs who drive economic growth”, and that her government would systematically strive to remove the barriers they face. Yet far from encouraging entrepreneurs, our current tax system punishes them. Despite what perennial miserablists like the left-wing trader Gary Stevenson might say, lots of people want to be entrepreneurs – 64 per cent of the UK workforce say that they would like to set up their own business. Yet too often they are constrained by a lack of resources, which is cited as the biggest factor standing in the way of prospective would-be bosses; 85 per cent of new businesses relied on their founders’ personal capital as the initial source of funding.
A substantial part of this will be income from work. High earners who have had successful careers are the most likely candidates – and are precisely the type of people who are most likely to thrive as entrepreneurs. Yet they are faced with punishing marginal taxes. The higher rate of income tax is 45 per cent, but rises to 60 per cent when including the clawback of the personal allowance between £100,000 and £125,140. This is not to mention national insurance contributions which raise the rate up to 67 per cent. With the state taking nearly 70p out of every additional pound earned, it is not surprising that people would rather play it safe and stay on PAYE.
Why risk it?
It goes without saying that those who start new businesses are often motivated primarily by financial success. Yet while prospective entrepreneurs might start off buzzing with excitement about their latest business idea, their enthusiasm will no doubt be dampened when they learn of the many taxes on business owners. After risking it all and putting in enormous effort to build a profitable enterprise from nothing, the state comes along and takes a quarter of all profits through corporation tax. The previous government raised corporation tax from 19 per cent to 25 per cent, affecting all companies with profits over £50,000. If an entrepreneur wants to take some money out of their company, they are slapped with a further 24 per cent capital gains tax rate, which the current government raised from 18 per cent. Perhaps worst of all, the 40 per cent inheritance tax on anything that is left means that in many cases entrepreneurs will not even be able to pass what they have built down to their children. This has of course been extended to Britain’s farmers and family-owned businesses with the removal of Agricultural Property Relief and Business Property Relief.
Since 2020, the number of registered businesses has fallen by 11 per cent
Reducing the resources prospective entrepreneurs have access to, and lowering the financial rewards of setting up a business, has diminished entrepreneurship. Since 2020, the number of registered businesses has fallen by 11 per cent, reversing an upwards trend since 2010. The period since 2020 has also seen a starker reduction in VAT registrations than either the early 1990s recession or the period after the great financial crisis. Fewer businesses means fewer jobs, less growth and ultimately less tax revenue. While raising taxes on entrepreneurs may raise money in the short term, in the long term it has a negative impact on public finances.
Altogether, from the very first penny received from an employer to the very last penny passed down to one’s children, the tax on entrepreneurship can get up to 93.1 per cent. Assuming some reasonable tax planning brings that number down to 83.5 per cent. That is 4.3 percentage points higher than before the Chancellor’s budget.
The long-term answer is to radically simplify the tax system, which would offer a predictable and stable system in which to operate. In the meantime, we should remember the basics. If you want less of something, you tax it more – as most countries do with things like tobacco and alcohol duties. Why do we think the same doesn’t apply to entrepreneurship? If we want more of it, we need to cut taxes. Backing Britain’s entrepreneurs would truly allow the chancellor to “go further and faster to kickstart growth”.
John O’Connell is the chief executive of the TaxPayers’ Alliance