Encouraging small businesses- (08.06.02)

One of the features of Gordon Brown's last budget which did not get a great deal of immediate publicity was a change to the way that dividends are taxed. Without going into the details, this basically gave a large incentive to small business owners by allowing less taxation on a dividends than on the payment of a salary.

To a certain extent this reversed some of the tax rules of the last few years that tried to cut down on the self employed who effectively only worked for one employer. There is now an incentive once more for these people to save tax through this type of structure, the difference now being that they must set themselves up as a limited company to do so.

The cost of this tax break may turn out to be as much as £3bn per annum, but the theory is that this will not cost this much if it encourages entrepreneurs to turn ideas into thriving small businesses. Past tax breaks based more on allowances and grants have tended just to see employment transferred into self employment rather than creating any economic benefits. It will be interesting to see if lower taxation and its more obvious benefit to the individual will make any difference.