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Budget 2017 – Headlines for Freelance Contractors and Small Businesses

Budget 2017 – not as bad as it could have been???

There has been quite a backlash to certain elements of spreadsheet Phil’s budget 2017 stand-up routine on Wednesday and there were definitely some headline items that were not particularly welcome for freelance contractors and small businesses.

However, we take a slightly different approach to some in thinking that:

a) The changes announced weren’t as “devastating” or “catastrophic” for the freelance and self-employed community as has been suggested by some hyperbolic industry bodies; and

b) That the budget and resulting impact, when viewed in the round, was perhaps not as bad as could have been feared.

In terms of some specific points from budget 2017:

  1. Reduction in the tax-free dividend allowance: the £5,000 allowance introduced in April ’16 when the changes to dividend tax were brought in will be reduced to £2,000 from April 2018. This will lead to an increased tax bill of between £225 and £975 a year (for those earning up to £150,000), estimated at an average of £315 across the UK, for incorporated small businesses and limited company contractors, starting a just over year from now. However…
  2. Corporation Tax rates: will reduce from 20% to 19% from April this year (and again to 17% in 2020). This means a 1% reduction in the tax on business profits, which for many limited company contractors, who do not have high costs in relation to their income, will equate to not far off 1% of their total business income. For most, this 1% reduction will offset, and in many cases will exceed, the impact of the reduction in the dividend allowance, meaning they will actually be better off on a like-for-like basis, both from April ’17 and April ’18.
  3. Basic rate Class 4 NICs for the self-employed – i.e. sole traders and partnerships not incorporated businesses, will increase by 1%, from 9% to 10%, in April ’18 and again to 11% in April ’19. This will affect businesses with profits over £15,570 and will have a maximum impact of circa £589 per year for those with profits over £45,000 (the impact of the Class 4 increase being reduced by other changes in the self-employed NICs system)… and yesterday’s suspected u-turn by the PM suggests this now may be reviewed as part of a package of measures in the summer in any case.
  4. Off Payroll Working in the Public Sector: these changes announced some time ago are to be implemented as expected and we are already seeing many public sector freelancers either fleeing to the private sector or switching to an umbrella option, which offers full employment rights and benefits when provided by a reputable and compliant operator. The changes do not in any way affect whether an individual contractor or assignment is ‘inside’ or ‘outside’ of IR35, as the law on this is completely unchanged. Rather, they simply transfer the responsibility for making the IR35 decision to the entity paying the contractor (usually a recruitment agency, sometimes the client) and where the contractor is inside IR35, for deducting the PAYE and NI at source and paying the limited company net. Hence, many (understandably) risk-averse clients and agencies will tell their contractors they now have no choice of how to work, regardless of the genuine status of the engagement itself! Please note – the changes only apply to those working for a public sector end client and there was no announcement that this will be extended to contracts in the private sector – again trying to see the positive here.
  5. Making Tax Digital: implementation has been deferred by a year to April 2019 for all businesses with turnover below £85,000 and for unincorporated businesses, putting on hold a large chunk of extra admin for small businesses each quarter (good to see the government continues to simplify the tax system and reduce red-tape for entrepreneurs and business owners!)

 

We are not complacent – no doubt budget 2017 was an anti-business affair generally and the government is clearly continuing its misguided “levelling of the playing field” between employees and the entrepreneurs, business owners, freelance and self-employed workers that it simultaneously claims are the lifeblood of the economy, the driver for current record low unemployment, the reason the UK’s economic recovery was so (comparatively) strong and the very people they want to support (funny way of showing it… words thoroughly undermined by actions).

However, maybe the instant backlash they have received over these most recent budget 2017 measures and their likely detrimental impact on projects, productivity, growth, entrepreneurial ambition and badly needed skills (particularly against the backdrop of Brexit), will make them think twice before doing anything else even more damaging.

By way of a more general ‘at a glance’ update of budget 2017 measures for small business owners and freelance contractors, most of which were pre-announced:

  • Increases in the personal allowance from £11,000 to £11,500 and in the 40% higher rate tax threshold from £43,000 to £45,000 from April ’17 – further reducing the impact of the increases noted above
  • Increase in the annual ISA savings allowance from £15,240 to £20,000 and introduction of the Lifetime ISA, allowing savings of £4,000 a year with a 25% government top up (qualifying conditions apply)
  • Reduction in Corporation Tax on limited company profits from 20% to 19% in 2017 and again to 17% in 2020
  • Simplification of R&D tax credits
  • Phasing in of reduced tax relief on mortgage interest for buy-to-let, second homes and landlords, starting in April ’17
  • Implementation of the Apprentice Levy in April ’17, costing 0.5% of an employer’s payroll bill for businesses with a payroll cost of £3 million or more per year (another payroll tax… ahem, I mean another pro-business, job-creation initiative!)
  • Increase in the national minimum wage to £7.50 an hour for the over 25’s in April ’17 (lower rates for those below 25 and apprentices)
  • Increase in the capital gains tax allowance from £11,000 to £11,300 from April ’17
  • Some limited support for small businesses in relation to the forthcoming business rates revaluation, including i) a cap on annual increases for those losing small business rates relief, ii) £300m for local authorities to use on a discretionary basis to support individual cases and iii) a £1,000 discount for pubs with a rateable value of up to £100,000, for 1 year from April ’17

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