The 2017 Spring Budget will be remembered for the strong opposition to the Chancellor’s twin tax attack on limited company shareholders and the self-employed.
Here we the main points for contractors and other business owners…
Dividend Allowance cut from April 2018
A new dividend tax regime took effect in April 2016. Alongside a series of new dividend tax rates, the Government also provided a £5,000 ‘dividend allowance’ – which is a nil tax bad for the first £5,000 of dividends received by a taxpayer.
However, a mere nine months after this major change to the dividend taxation system took place, the Chancellor has announced a cut in the dividend allowance to £2,000 from April 2018.
If the first £5,000 of dividends falls with the basic rate band, you will be £225 per year worse off as a result of this change. For higher rate taxpayers, the hit is £975 per year, and additional rate taxpayers will be £1,143 worse off.
If you draw down a relatively small salary, as many limited company owners do, you will most likely face a £225 charge during the 2018/19 tax year, although this may be offset to some degree by a cut in Corporation Tax, and future increases in the Personal Allowance.
Self-Employed National Insurance hike
Small business owners who pay Class 4 National Insurance Contributions (NICs) were handed an unwelcome tax rise by the Chancellor.
From April 2018, Class 4 NICs will increase from 9% to 10%… and to 11% from April 2019.
Opposition to this increase has been intense – from business groups, and from members of the Conservative party. As a result, this particular measure may be re-assessed in time for the next Budget, which takes place in Autumn 2017.
Class 2 NICs are to be phases out altogether, as planned, from April 2018.
Please note that IT Contractors are not affected by this measure, as you pay Class 1 NICs if you work via an intermediary (limited or umbrella company).
Public Sector IR35 changes to go ahead
From April 2017, public sector organisations will be tasked with determining the employment status of contractors (rather than the contractors themselves).
Earlier this month, HMRC released a new IR35 status test to help those affected to work out if they are inside or outside IR35 – although initial reviews of the tool have been decidedly mixed.
The Budget confirmed the Government’s decision to go ahead with these changes, unamended.
Other changes / announcements
A number of tax changes will take affect from April 2017 – many were pre-announced:
- Corporation Tax will be reduced from 20% to 19% from April 2017 – a rare benefit for limited company contractors.
- The VAT registration threshold rises to £85,000. The deregistration limit is £83,000.
- If you use the Flat Rate VAT (FRS) scheme, and have limited costs (expenses), you may have to pay a higher flat rate percentage of 16.5% from April 2017. You can read the official guidance here.
- The thresholds before Employers’ and Employees’ National Insurance Contributions become payable will be aligned at £157 per week.
- The personal allowance rises from £11,000 to £11,500.
- The higher-rate income tax threshold rises to £45,000.
- £435m is to be spent helping businesses affected by the business rate hike.
- Fuel duty has been frozen.
- Alcohol duties have risen by RPI inflation.