Today (8th March 2017) Philip Hammond announced the Spring Budget at the House of Commons. This year’s Brexit-conscious budget will have a significant impact for SMEs, contractors, freelancers and the self-employed. In this blog we’ll be taking a closer look at 7 key points that your business needs to prepare for.
National Insurance Increase for Self-employed
UPDATE: As of 15th March 2017 the Government has overturned the planned changes to Class 4 National Insurance. Chancellor Philip Hammond released the following statement to Tory MPs,
“The measures I announced in the Budget sought to reflect more fairly the difference in entitlement in the contributions made by the self-employed and address the challenge of sustainability in the tax base.
“The government continues to believe that this is the right approach.
“In light of the debate over the last few days it is clear that compliance with the ”legislative” test of the manifesto commitment is not adequate.
“In light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with the Class 4 NIC measures set out in the Budget.
“There will be no increases in NICs rates in this Parliament.”
The Chancellor also said he will explain how he plans to fill the gap in incoming finances generated by this u-turn in a Commons statement soon.
The original planned changes to NI are detailed below in grey.
From April 2018, self-employed individuals whose business nets more than £8,060 in profits annually will see an increase in their National Insurance payments. Class 4 self-employed individuals currently pay 9% on profits between £8,060 and £43,000, compared to employed who currently pay 12% across the board.
The rate for Class 4 is rising to 10% in April 2018 and then to 11% in 2019, closing the gap between self-employed and employed. The rate for profits above £43,000 will be remaining unchanged at 2%.
Historically, the lower rate applicable to self-employed acted to offset the benefits that employed people had access to, but self-employed did not. Hammond feels that this is no longer justified, however he did admit that all the employed benefits are not yet accessible to the self-employed and that they would be working on this.
An example from the Resolution Foundation states that a self-employed management consultant who earns £51,100 will be £620 worse off per year. However, those who earn less than £16,250 will be better off thanks to the planned abolition of Class 2 National Insurance on 6th April 2018.
Dividend Allowance Reduction
Many contractors rely on dividend payments to minimise their tax losses and take full advantage of the current tax-free allowance of up to £5,000. Unfortunately this is set to change too, from April 2018 the tax-free allowance will be capped at £2000.
The rates after the tax-free allowance threshold will remain the same; 7.5% for basic-rate, 32.5% for higher-rate and 38.1% for additional-rate tax payers. This change is expected to affect over 2 million company owners and shareholders.
So with this news, it may be time to start planning how to best pay yourself from 2018 onwards. Contact your accountant at Warr & Co for further advice.
Making Tax Digital – On Hold For Some
The Chancellor has heard the concerns of small businesses regarding Making Tax Digital which was planned to go ahead from April 2018 onwards. It has now been announced that unincorporated businesses whose annual turnover is below the threshold of £83,000 pa will be granted an extra year to prepare.
Hopefully this means that the Governments promise to provide software for small businesses to utilise will be tried and tested well ahead of the new deadline of April 2019. However larger businesses will still need to prepare over the next 12 months.
Reduced Corporation Tax
As previously mentioned in the Autumn Statement, Corporation Tax is due to fall to 17% by 2020. With the aim of attracting businesses to a post-Brexit UK, the reduced rate will begin this year with a fall to 19% this April and falling a further 2% by April 2020.
VAT registration and deregristration limits
Changes coming into effect from April this year regarding VAT registration/deregistration thresholds to bring them back in-line with inflation.
The registration threshold will now be £85,000 (previously £83,000) and the deregistration threshold has increased to £83,000 (previously £81,000).
Increase to the Cash Basis Threshold
Popular with self-employed individuals, the Cash Basis is a simplified way to calculate business profits. The entry threshold for entry into the Cash Basis is increasing from £83,000 to £150,000. The exit threshold will also be increased to £300,000. This significant increase is intended to help open up Cash Basis to more small businesses.
Again, this change comes into affect in a few weeks time on the 6th April 2017. Find out more about Cash basis here and how your business can apply here.
The final announcement we’re covering today is regarding the NS&I bond announced in the 2016 Autumn Statement. The new National Savings and Investment bond has been described today a three year bond that pays a 2.2% return. The NS&I will be available for a limited time, April 2017 – March 2018 and is open to anyone aged 16 or over.
With a minimum investment of £100 and a maximum of £3,000, this bond is not going to have a huge impact on many, especially considering predicted increased living costs of 3+% during those three2 years.
While today’s announcements feel like the Government is tightening the belt on the self epmolyed and small businesses, it is wise to weigh everything together to see the full picture. Yes, the Government will be taking more from contractors and freelancers in terms of increased taxes, but these same businesses can also benefit from the reduced corporation tax rate. The Corporation Tax rate is reducing almost immediately, while we have until 2018 for the increased National Insurance and taxed dividend threshold to come into effect.
The delay to Making Tax Digital is also a welcome announcement for most of our clients who now will not have to make these changes for a further 2 years.
However we must not forget two important previously announced changes coming into affect this April that will impact contractors and freelancers.
Public Sector IR35 reform that will sadle public sector bodies and recruiters with the responsibility of determining IR35 status, and changes to the Flat Rate Scheme which you can read more about on our blog.