UK tax policy for small business founders has become a running joke among anyone who has actually tried to build something in this country. Every budget, every policy speech, every election campaign has something in it about backing entrepreneurs, encouraging innovation and making Britain a great place to start a company. And then they quietly introduce another tax change that makes it harder to do exactly that.
I have been running businesses in the UK for over twenty five years. I have bootstrapped multiple companies, employed people, paid corporation tax, VAT, PAYE, employer National Insurance, business rates, and whatever else HMRC could think of. I am not anti tax. I understand that public services need funding and I am happy to pay my fair share. What I am not happy about is a system that consistently penalises the people who take the biggest financial risks.
Corporation tax went up and nobody seemed to care
In 2023, the UK corporation tax rate jumped from 19% to 25% for businesses making more than £250,000 in profit. That is a 32% increase in the rate itself, which is extraordinary by any measure. For context, Ireland charges 12.5%. Poland charges 19%. Even France, hardly known for its love of low taxation, charges 25% and has been cutting it steadily for years.
The argument was that large corporations should pay more. Fair enough. But the threshold means this hits growing small businesses just as hard as it hits the multinationals. If you are a small company that has finally reached the point where you are making decent money after years of graft, congratulations, the government would like a quarter of it please.
The timing was especially brutal. Coming out of COVID, with energy costs through the roof and inflation eating into every margin, small businesses were already on the ropes. And the response from government was to increase their tax burden. It sent a clear message: we talk about supporting small business, but when we need money, you are the ones paying for it.
Dividend tax is a stealth penalty on founders
Most small business owners in the UK pay themselves partly through dividends. This is not some clever tax dodge. It is the standard way owner directors have been compensated for decades, and the entire tax system was designed around it. But successive governments have been chipping away at dividend allowances and pushing up rates to the point where the incentive to take the risk of starting a company is genuinely disappearing.
The dividend allowance has been slashed from £5,000 to £500. The tax rates on dividends above that are 8.75% at the basic rate, 33.75% at the higher rate and 39.35% at the additional rate. Combined with corporation tax already paid on those same profits, the effective rate for a higher rate taxpayer taking money out of their own company is well over 50%.
Think about that for a second. You risked your savings, worked eighty hour weeks, went without a salary for months, built something from nothing, and the government takes more than half of what you earn from it. Meanwhile someone in a salaried position with none of that risk pays a lower effective rate. How exactly is that encouraging entrepreneurship?
IR35 put the burden on the wrong people
The IR35 reforms were supposed to stop large companies from disguising permanent employment as contracting. A reasonable goal, badly executed. Instead of going after the companies doing the disguising, the government shifted the responsibility for determining employment status onto the businesses hiring contractors.
For small businesses that rely on contractors for specialist skills, this has been a nightmare. The rules are complicated, the guidance is vague, and the penalties for getting it wrong fall on the hiring company rather than the contractor. The result is that many businesses have simply stopped hiring contractors altogether, or they have pushed everyone onto the payroll whether it makes sense or not.
I have seen this first hand through my consulting work. Businesses that used to bring in specialist contractors for specific projects now either cannot afford to or are too scared of the compliance risk. The people who suffer are the small businesses who lose flexibility and the genuine freelancers who lose work. The large consultancies and umbrella companies, predictably, are doing just fine.
The cumulative effect is what really kills you
Any one of these changes in isolation would be annoying but manageable. It is the cumulative effect that is devastating. Corporation tax up. Dividend tax up. National Insurance up. Auto enrolment pension contributions mandatory. Business rates still based on property values from a different economic era. Making Tax Digital adding admin burden with every quarterly submission.
Each change comes with its own justification and its own set of reassurances that small businesses will not be affected. And each one, individually, is perhaps survivable. But stack them all together and you have a system that makes it genuinely harder to run a small business profitably in the UK than in almost any comparable economy.
I know plenty of founders who have either moved their businesses abroad, stopped hiring, or simply decided not to start another company. These are exactly the people the government claims to want more of. The disconnect between political rhetoric and policy reality is staggering.
The employment tax trap
Want to hire someone? Great. On top of their salary you will pay employer National Insurance at 13.8%, auto enrolment pension contributions of at least 3%, and you will spend hours dealing with PAYE administration that gets more complex every year. For a small business hiring its first employee, the true cost is roughly 20% above the headline salary before you even think about equipment, training or management time.
I wrote about the challenges of hiring your first developer previously, but the tax angle deserves its own mention. The system actively discourages small companies from growing their teams. Every new hire is a significant financial commitment that goes well beyond the salary you agree, and the paperwork burden scales in a way that disproportionately affects businesses without a dedicated HR or finance function.
Large companies absorb these costs across thousands of employees and have entire departments to handle compliance. A founder with three staff members is doing payroll at midnight on a Sunday. The system does not distinguish between the two, and it bloody well should.
What would actually help
I am not asking for handouts. I am not asking for zero taxation. I am asking for a tax system that recognises the difference between a multinational corporation and someone who remortgaged their house to build a software product in their spare room.
A genuine entrepreneur relief that actually means something. Corporation tax rates for small businesses that reflect the risk those founders carry. Dividend taxation that does not punish you for taking money out of a company you built from nothing. IR35 rules that target the actual problem instead of creating collateral damage across the entire freelance economy.
And most importantly, stability. Every budget brings new changes, new thresholds, new compliance requirements. You cannot plan a business when the tax landscape shifts every twelve months. The most valuable thing the government could give small business owners is the confidence that the rules will not change again next year.
Why I still do it anyway
Despite all of this, I am still building businesses. I still think the UK is a good place to start something, primarily because of the market, the talent and the legal framework around intellectual property and contract law. The fundamentals are sound even if the tax system is working against you.
If you are thinking about starting a business despite the tax headaches, I would still encourage you to do it. The rewards go well beyond money. I cover the practical side of getting a business off the ground quickly in The 28 Day Startup, including how to structure things tax efficiently from day one so you are not scrambling to fix it later.
But let us stop pretending the system is set up to help entrepreneurs. It is not. And until the people making the rules have actually built something themselves, risked their own money, missed their own paycheques, and sat up at night wondering whether they can make payroll, I do not expect that to change. The people writing tax policy have never had to live with the consequences of it, and it shows.
