Budget 2016 is largely positive for contractors and small business owners
In his eighth Budget, Chancellor of the Exchequer George Osborne has set out measures to improve the health of the UK economy. The 2016/17 Budget aims to balance the country’s finances as well as reduce national debt and the budget deficit.
The long-term plan for a budget surplus stands and there appears to be support for smaller businesses in terms of tax reductions and an increase to the personal income tax allowance and the higher rate tax threshold.
Budget 2016 also targets large multinationals to ensure they pay their fair share of tax, helping to reduce the pressure and tax burden on small businesses.
Find below short summary of each of the major changes announced.
Travel and Subsistence (T&S):
In September 2015, the government published a document discussion aimed at modernising tax rules for T&S expense claims for contractors working through employment intermediaries, i.e. umbrella company users. This has concluded that as of 1st April 2016, T&S claims will be abolished for all workers claiming home to work expenses when engaged in work via an employment intermediary. This will not affect contractors who operate outside IR35.
Personal Allowance Increase:
The government will increase the Personal Allowance for income tax from £11,000 in 2016/17 to £11,500 in 2017/18. Therefore, the typical basic rate taxpayer will pay £1,000 less income tax in 2017/18 than they did in 2010/11.
Higher rate tax threshold increase:
Currently, anyone earning over £40,000 is taxed at 40% for all income above this amount. In the 2016/17 tax year, the government will increase this threshold to £43,000 and in 2017/18, a further increase will raise the threshold to £45,000.
In addition to this, National Insurance Contributions (NIC) Upper Earnings Limit will also increase to remain aligned with the higher rate threshold.
Corporation Tax:
As you know, Corporation Tax will be reduced as of 1st April 2017 to 19% and the government has confirmed that by 2020 this will be as low as 17%. This will provide a long term saving on the amount of Corporation Tax that businesses need to pay on company turnover. This applies to small profit rates only.
Capital Gains Tax:
Capital Gains Tax (CGT) will be reduced from 6th April 2016, the higher rate of CGT will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.
VAT Registration threshold:
The government will increase the VAT registration threshold in line with inflation to £83,000 from 1st April 2016. This is important to note if you don’t plan to register your limited company for VAT.
Property Income:
In April 2017, the government will provide landlords with a £1,000 tax free property allowance.
Abolishing Class 2 National Insurance Contributions:
The government will abolish Class 2 NICs for all self-employed workers. This means a saving of £2.80 per week if profits are £5,965 or more per year. The government says this will result in a tax saving of more than £130 to three million self-employed workers from 2018.
ISA:
The overall annual ISA limit, meaning the tax free amount you can add to your ISA savings account each year, will increase on 6th April 2017 to £20,000. This is an increase of £4,760 from the current ISA contribution limit of £15,240.
A new Lifetime ISA account is being introduced for anyone under 40, which includes a 25% government boost on savings put in.
To help you save for a house deposit or your retirement, you can save up to £4,000 each year to help buy first home and save for retirement. With the government paying £1 for every £4 saved.
If you want to use this to help purchase a home, you can withdraw the funds after one year of saving. For those saving for retirement, you can continue contributing into the ISA until the age of 50 and withdraw the funds at age 60. This means that some savers will be able to save £5,000 a year until they turn 50 years old which can be taken out at age 60.
This extends to homes with a value of £450,000 in London.
Dividend Taxation:
As confirmed in the Summer Budget, the government will proceed with the removal of the dividend tax credit, and instead permit a £5,000 tax free dividend allowance from 1st April 2016. If you are worried that you will be affected by this change, see our advice on dividend tax planning here or use the contact information below to speak to one of our experts for more advice on your finances. Our dedicated Personal Tax team will be able to provide you with more advice on this.
Employment Allowance:
The employment allowance is changing. As of 6th April 2016, the Employment Allowance will no longer be available to companies where the director is also the sole employee of the company.
While the Employment Allowance is increasing from £2,000 to £3,000, due to the additional criteria you need to meet of not being the only employee of your own limited company, a large number of contractors will no longer be able to make use of this. You can contact our team to find out more about this change.
Loans to participators:
If a company director has a director’s loan outstanding, they will pay an additional Corporation Tax amount (s455) at 25% of the total outstanding loan amount (deducting any repayments within 9 months of the year end). Once a director repays this amount back fully then the s455 Tax is recoverable from HMRC. It is not quick and can take some years to receive back.
The budget states that any director’s loans taken out after 6th April 2016, will see an increase in the tax rate to 32.5% from 25%. This means companies will have to pay a higher rate of tax for any outstanding director’s loans.
The restriction on the use of Personal Service Companies for public sector workers:
In a clamp down on false self-employment by public servants, the government has stated that individuals who work through their own limited companies but undertake jobs that would ordinarily mean they are employees of that business, will find they are going to be restricted in the use their limited company for such cases.
Under these circumstances, from April 2017, where the public sector engages an off-payroll worker through a limited company, that body (or the recruiting agency if the public sector body engages through one) will become responsible for determining whether the rules should apply, and for paying the right tax.
Other good news:
Other good news coming out of the Budget includes a freeze on fuel duty for the 6th year in a row. This represents savings of £75 per year for the average driver, and £250 savings per year for the average small business owner with a vehicle.
George Osborne has also decided on a freeze on duties for beer, cider, whiskey and other spirits for the 2016-2017 tax year.
The key phrase that will resonate with our clients and all contractors is that George Osborne wants to “let them keep more of the money they earn”. This means that as a contractor you can continue to benefit from an increased take home pay.
Osborne is in support of the small business community in the UK in this Budget with “lower taxes on business and enterprise” in order to help small business and the economy to grow.
How we can help:
Our service provides contractors with an accountancy payroll service that stays a step ahead of the changes. We have responded quickly to the dividend taxation changes and devised a plan that will help contractors to maintain the maximum take home pay possible.