The Chancellor repeatedly lauded his ambition to make Britain “the best place to start and grow a business” in the Spring Budget today, yet the self-employed and business directors face tax penalties.
The dividend allowance has been cut by more than half and National Insurance bills are set to increase for the self-employed. However, there was some good news, with the creation of a £300m fund to help reduce the impact of business rate re-evaluations on those losing Small Business Rates Relief.
We’ve set out the key changes and what it means for your business below. Let us know what you think in the comments.
1) Small businesses set to benefit from three business rate reliefs
The Chancellor recognised the impact of the business rates revaluation, which is due to be applied from April and will have a severe impact on businesses in areas with rapidly increasing property values.
In Hackney, where the Tories promoted the rise of Silicon Roundabout as a leading startup hub, businesses faced an average rate increase of 46% – five times the national average.
In many cases, the increase in rateable value will mean businesses are no longer qualified for Business Rate Relief as their rateable value increased past the £12,000 threshold.
“The re-evaluation has undoubtedly raised some hard cases, particularly for those coming out of small business rate relief,” said Chancellor Philip Hammond. His answer was to implement three key policies in a package which is expected to cost £435m over its course:
- No business losing Small Business Rates Relief will see their bill increase by more than £50 a month next year (expected to cost the government £25m in the next financial year)
- 90% of local pubs will have a £1,000 discount on their business rates bill (expected to cost the government £25m in the next financial year)
- A £300m fund for local councils to offer discretionary relief for hard-hit cases
The government also wants to look at how the digital economy is taxed compared to their brick and mortar counterparts: “In the medium-term, we have to find a better way to tax the digital part of the economy,” says Hammond, adding this will happen before the next rate revaluation.
2) Reduction of the tax-free Dividend Allowance from £5,000 to £2,000
At the moment, the Dividend Allowance means director and shareholders of companies can take £5,000 of dividends out of their company tax free, over and above their personal allowance.
The Chancellor described this as an “extremely generous tax break for investors with substantial share portfolios” and cut the allowance from £5,000 to £2,000 from April 2018.
About half the people affected by this measure are directors or shareholders of private companies, according to Hammond, “the rest are investors in shares with holdings worth, typically, over £50,000 outside ISAs”.
The measure is expected to raise £325m in 2018-19, increasing to £645m in 2019-20, according to the government’s Budget policy costing documents.
Emma Jones, founder small business support group Enterprise Nation, said small business had been "hammered" by this and other changes: "Corporation tax reduction will massively benefit big business. Meanwhile, the small business has to make do with fewer rewards for their hard work through the increase in dividend tax. Far from making Britain the best place to start and grow a business, this has made it harder and less rewarding."
3) Self-employed face increase in National Insurance Contributions
After a long introductory spiel, the Chancellor unveiled changes to the way self-employed people pay National Insurance Contributions (NIC) - the rate will increase by 1% to 10% in April 2018.
Hammond argued that the difference in taxation between employed and self-employed people wasn’t fair given their use of services, and that the choice of status shouldn’t be driven by differences in tax treatment.
“An employee earning £32,000 will incur between him and his employer £6,170 of NIC. A self-employed person earning the equivalent amount will pay just £2,300 – significantly less than half as much.
“Historically, the differences in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits. But with the introduction of the new state pension, these differences have been very substantially reduced,” he said.
From April 2018, when Class 2 NIC is abolished, the main rate of Class 4 NICs for the self-employed will increase by 1% to 10%, with a further 1% increase in April 2019. Self-employed people pay Class 4 NIC if their profits are £8,060 or more per year.
Lucy-Rose Walker, CEO of startup incubator Entrepreneurial Spark, reacted to the measure with dismay during BusinessZone’s live coverage: “We believe there should be more, not less, support for entrepreneurs who are starting and scaling businesses. Removing the few remaining incentives of being self-employed is counter-intuitive and will lead to fewer enterprises and consequently fewer jobs.”
In the long term, Matthew Taylor, Chief Executive of the RSA, will consider the wider implications of different employment practices, no doubt taking into account the much-maligned gig economy.