Self-employed National Insurance
The increasing rates of class 4 National Insurance really grabbed the headlines. The rate of National Insurance that self-employed people pay on their profits was to increase from 9% to 10% in 2018 and then from 10% to 11% in 2019.
Having run the numbers and compared the tax position of a self-employed business owner earning £30,000 per year and £60,000, we identified that next year they would have been £26 better off and £24 worse off respectively. That’s per year.
How could this happen? Firstly it is because of the planned abolition of class 2 National Insurance, the flat rate of NI that was paid, of £145 per annum. Plus we also have to take into account the promised rises in personal allowances. This is something that the press did not consider.
Now that this change is not coming in, most self-employed people will be at least £145 per annum better off with the abolition of the class 4, plus slightly better off with the annual increase in personal tax free allowance.
We are now wondering, given that this National Insurance measure accounted for about half of the budgeted additional tax inflow over the coming year, where this shortfall is going to be saved?
The other main announcement was the reduction in the dividend allowance, from £5,000 to £2,000. This means that the first £2,000 of dividend is tax free, before tax is paid at 7.5% or 32.5% depending on the tax payer’s marginal rate of tax. Sadly nobody got upset about this change and it is staying.
This will cost basic rate tax payers a maximum of £225 per annum and higher rate tax payers a maximum of £975.
This is by no means as big an impact as the actual bringing in of the dividend tax last year. This cost many company director/shareholders up to £2,250. People are going to start feeling the impact of this once their 2016/17 tax returns are prepared.
Making tax digital
HMRC are in the process of bringing in mandatory digital tax filing for all individuals and businesses. We are largely there anyway, what with online VAT returns and most businesses filing tax returns online. The main change we are looking at is quarterly reporting of profits and hence payment of tax and national insurance.
This is potentially a massive change and a logistical nightmare for the Government to bring in. So much so, that they have delayed inclusion in this scheme for smaller business owners with turnovers less than the VAT threshold.
Rates and allowances
Please refer to our Tax and NI rates page of the website to familiarise yourself with the rates for 2017/18. There were no further changes to these, other than the announcement of the National Insurance rise.
Having performed calculations, we have identified that the payment of small salary and dividend to small company shareholder/directors remains the most tax efficient remuneration method, although the advantage has been eroded somewhat over the last couple of years.
Whilst there was no firm announcement in the budget, the Government has made it clear that they are continuing to look into benefits in kind provided to employees and we expect them to be making changes in the future. Our advice remains as it always has been, before buying or giving anything other than wages via PAYE to an employee, including company directors, check with your accountant to ensure that you are not saddling yourself with a potential tax burden.
Finally, this is the first budget of 2017. The Autumn statement last year indicated that there would in future be a single budget announcement each Autumn. Therefore we can expect another budget later this year, our suspicion is that this may have been the reason that there was little content to this one.
We hope this gives you a good update of how the budget might affect your business. If you would like further clarification on any areas, please do not hesitate to contact us on firstname.lastname@example.org