Hard times ahead for the self-employed
Traditionally we tend to think of the Tory party as the party of business, both big and small.
Increasingly it would seem that small businesses have fallen out of favour with the Conservatives and are now seen as an easy target for the squeezing of more taxes.
The Government pledged in its manifesto (in several places) not to increase VAT, Income Tax or National Insurance during this parliament. Didn’t leave them much scope to raise money to reduce the deficit; Corporation Tax? Ah, no, they had already announced that this rate was coming down.
However the self-employed or owner managed business people obviously did not count with regard to that pledge:
National Insurance UP for the self-employed by 2% – the argument goes that it will equalise the ‘discrepancy’ between employed rate of 12% and self-employed rate of 9%. This of course conveniently forgets that the self-employed don’t get statutory sick pay, paternity pay, holiday pay etc. There are good reasons for the discrepancy.
Income tax on dividends was introduced in this parliament at 7.5% on dividends over £5000. Designed mainly to hit owner managed companies. From next year the tax will be on all dividends over £2000.
VAT: the easy to use Flat Rate Scheme has all but been abolished for service industries. From April hairdressers, for example, will be 4% worse off than they are now if they continue with the Flat Rate Scheme
The self-employed, by their very nature, are a disparate group and despite representing 13.5% of the working population don’t have much influence over government policy. Time for the FSB to take up the cudgel.
Personal Allowance goes up to £11,500.
40% income tax band starts at £45,000.
VAT threshold up to £85,000.
Corporation Tax down from 20% to 19%.
Employers (not self-employed!) again will get a £3,000 National Insurance rebate.
Rates and allowances:
The increase in the personal allowance for income tax from the current £11,000 to £11,500 for 2017/18, as previously announced, has been confirmed.
Currently individuals start paying higher rate of tax (40%) when their total income exceeds £43,000. For 2017/18 this threshold will become £45,000.
It was also confirmed that it is the government’s intention to continue increasing the personal allowance and threshold which is expected to be £12,500 and £50,000 respectively by the end of this parliament.
There were no changes in the additional rate of tax of 45 % which starts when taxable income exceeds £150,000.
The dividend allowance of £5,000 which was introduced in April 2016 will be reduced to £2,000 from April 2018. This measure which will be included in the Finance Bill 2017 is bound to affect anyone receiving dividends in excess of £2,000 from April 2018 onwards.
Personal Savings Allowance:
The personal savings allowance of £1,000 relating to savings income (such as interest from banks, building societies, credit unions, National Savings, government bonds, authorised investment trusts etc) will continue to apply for 2017/18 for base rate tax payers.
This allowance is reduced to £500 for higher rate taxpayers and is not available for additional rate taxpayers.
The Chancellor confirmed that the ISA annual limit, currently £15,240 will be increased to £20,000 for 2017/18.
The new Lifetime ISA for people under 40 will also start from 2017/18. Savers will receive a 25% bonus from the government with a maximum of £1,000 per annum. Lifetime ISA funds can be withdrawn free of tax to be used in the purchase of the saver’s first home or when the saver reaches the age of 60.
A new savings bond with a gross yield of 2.2% will be issued by National Savings & Investments. Anyone over the age of 16 will be able to invest between £100 and £3,000 in this bond.
There were no changes to the pension rules.
Rates and Allowances:
For the financial years starting 1st April 2017 and 1st April 2018 the Corporation Tax rate for both large and small companies will be 19%. This rate will be reduced to 18% from 1st April 2019. The government confirmed their decision to reduce the Corporation Tax rate to 17% by 2020.
As previously announced, the first revaluation of business premises in England and Wales for seven years, will apply from 1st April 2017.
In view of the increase in the rateable value of properties during these seven years the Chancellor announced the following measures to assist business facing increased in their business rates:
- Any business losing the small business relief as a result of the revaluation will have the increase in their rates capped at £50 per month or the transitional relief whichever is greater.
- Local authorities will be given a hardship fund of £300m to provide discretional relief for individual cases of hardship.
- Public houses, with rateable value of less than £100,000, will receive a reduction of £1,000 in their rates bill.
The Chancellor hinted that the presence frequency of revaluations is not satisfactory and that the government will consult ahead of the proposed 2022 valuation with a view of introducing more frequent business premises valuations.
*** U-turn; no longer applicable **
In a controversial announcement the Chancellor proposed that at the same time the rate of Class 4 National Insurance contributions, also paid by the self-employed, will be increased from 8% to 9% with a further increase to 10% from 6th April 2019. The Chancellor has justified this increase as a necessary step in rectifying the disparity in NIC rates between employed and self-employed.
*** U-turn; no longer applicable **
As previously announced Class 2 National Insurance contributions currently paid by the self-employed at the rate of £2.85 per week will be abolished as of 6th April 2018.
Capital Gains Tax
The CGT annual exemption for 2017/18 will be increased from the current £11,100 to £11,300.
Capital Gains Tax rates:
The rates at which Capital Gains Tax is charged remain unchanged as follows:
- For standard rate taxpayers 10%
- For higher and additional rates taxpayers 20%.
- For those selling residential properties which are not their main residence 28%.
With effect from 1st April 2017 the taxable turnover registration threshold will be increased from £83,000 to £85,000. From the same date the taxable turnover deregistration limit will be increased from £81,000 to £83,000.
Flat Rate scheme:
There is a new rate for all ‘limited cost’ businesses. You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- Less than 2% of your VAT flat rate turnover
- Greater than 2% of your VAT flat rate turnover but less than £1000 per year or £250 per quarter.
The new rate is 16.5% which equates to paying 19.8% of the 20% VAT the business charges and under the scheme you cannot reclaim any VAT incurred.
All ‘limited cost’ companies should probably come off the Flat Rate scheme and prepare normal VAT returns or deregister from VAT completely if turnover is less than £83,000. Speak to your account manager if you think you are affected.
Nil Rate band:
The nil rate band of £325,000 remains unchanged.
From April 2017 the new additional nil-rate band will
be available when a private residence is being passed
on death to children or grandchildren. This allowance
will be £175,000 and it will be phased in over a number of years as follows:
- £100,000 in 2017-18
- £125,000 in 2018-19
- £150,000 in 2019-20
- £175,000 in 2020-21
Making Tax Digital
Business, self-employed traders and landlords are required to join the HMR&C digital service according
to the following timetable:
- April 2018 for income tax businesses (other than large partnerships) and landlords with turnover abovethe VAT threshold.
- April 2019 for income tax businesses and landlords with turnover below the VAT threshold and for VAT registered business.
- April 2020 for corporation tax and income tax for partnerships with turnover of more than £10m.
- Originally all unincorporated business and landlords with turnover under the VAT registration threshold were expected to join by April 2018 but the Budget introduced a relaxation allowing them to delay the introduction of the digital service until April 2019.
As previously announced any business, self–employed individual and landlord with annual turnover under £10,000 is currently exempt from the above requirements but legislation is being introduced to allow this threshold to be introduced through regulation.
A second Budget will be delivered by the Chancellor this autumn. However from 2018 onwards the annual Budget will be delivered in the autumn so that the relevant legislation could be enacted and be in place by the beginning of the following tax year.
If you have any queries about these points or any other please give Mark Partridge a call on 01273 447040.