Boring Budget hits the self-employed where it hurts most

Budget - self-employed
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Lesley Stalker
Tax Partner
RJP LLP
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There was speculation before today’s Budget hinting the Chancellor would do something to equalise levels of taxation between those who are employed and the self-employed.

The increase in the number of self-employed workers has been exponential in recent years, rising from 3.8 million in 2008 to 4.6 million in 2015. This apparently costs the Treasury £4bn in lost revenues, as reported in our recent blog, so it’s not surprising.

Phillip Hammond was true to his speculation, with the announcement of an increase to Class4 NIC rates.

Starting from 6 April 2018, Class 4 NICs will increase by 1% from 9% to 10% and then from 6 April 2019, will rise again to 11%.

If you are affected, you may be thinking that the time has come to incorporate. Unfortunately, there is no refuge to be had from becoming a limited company when it comes to paying taxes either. The dividend tax allowance came into operation in April 2016, replacing the notional 10% dividend tax credit. It entitles company shareholders to a tax free dividend allowance up to the value of £5,000 instead. From 6 April 2018, this amount is reduced to £2,000.

The reduction will mean higher taxes for taxpayers operating through a limited company. For example, close company owners who take large dividends as a form of remuneration (and other shareholders who receive dividends over £2,000) will see a range of increases in their tax liability as follows:

  • A 20% taxpayer receiving net dividend income of at least £5,000 will see a tax increase of £225
  • A 40% taxpayer receiving net dividend income of at least £5,000 will see a tax increase of £975
  • A 45% taxpayer receiving net dividend income of at least £5,000 will see a tax increase of £1,143

However, it is not all bad news and company owners can take solace in the reductions to corporation tax, which are not being revoked. The Chancellor today reaffirmed his and his predecessor’s commitment to ensuring that the UK is “the best place in the world to start up and operate a business”. From April 2017, the main rate of corporation tax will be 19%, dropping to 17% by 2020.

For innovative and tech related businesses in particular, the future indeed looks promising. There will be no change to the existing R&D tax credits initiative and as a result of recent consultations it is set to become less complicated for businesses to access the tax relief in the future. No details of what this involves have been announced by the government, but we will be following developments closely and reporting accordingly in due course.

In addition, a significant amount of money has been set aside to improve the UK’s future R&D prospects and we can only welcome initiatives such as these, especially for young people facing the uncertainty of Brexit. Today, Phillip Hammond announced a series of interesting education policies including £300m to support 1,000 new PhD places and fellowships in STEM (science, technology, engineering and maths) subjects.

The re-evaluation of business rates, which saw many small companies’ rateable values increase beyond the small business rates relief threshold, has been hugely controversial and a series of announcements made today are an attempt to reduce the impact of this.

Hammond has pledged that no business losing the small business rate relief will see their bill increase by more than £50 a month and councils are to be given powers to distribute £300m worth of discretionary relief to those hardest hit by the rises.  In addition, pubs with a rateable value of less than £100,000, which according to government figures is 90% of pubs, will get a £1,000 discount on their business rates bills in 2017.

The impending migration to a digital tax system is to be delayed for small business with a turnover below the current VAT threshold to April 2019 at the earliest (you can learn more about the digital tax system proposals and what it means in our earlier blog).

Tax avoidance remains a hot topic and as ever the Budget included an announcement of new anti-tax avoidance initiatives. The government is planning new legislation to prevent businesses converting capital losses into trading losses in order to reduce their tax liabilities. Nothing of this has been announced to date and we will be reporting on the proposed changes and likely impact as information becomes available.

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