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We have prepared our budget review with you, our client base, in mind and have tailored it to cover the most relevant updates. Some announcements made in the budget therefore may not be shown below.
Reduction in the dividend nil rate tax band from £5,000 to £2,000 as from April 2018.
When the 10% tax credit was removed in April 2016, the effect on the basic rate tax payer was an additional tax charge on dividends of £2,025, (this assumes the individual drew dividends and salary up to the basic rate band limit.) The reduction of the tax free band from £5,000 to £2,000 increases this liability by £225 making the total effect £2,250. Although this is an unexpected increase, it is less significant than the increase last year. However, when the £5,000 exemption was put in place, this reduced the impact on pensioners and savers who are simply investing in stocks and shares. The reduction to £2,000 will mean more of this group will be effected by the new dividend tax.
Increase in Class 4 self-employment national insurance contributions from 9% to 11% over the next two years starting April 2018.
This so far seems to be the change that has received the biggest reaction and for very good reasons. This measure will seem to have most effect on the middle income self-employed. From the announcement yesterday regarding “a need to bring into line the amounts paid by the self-employed and employed” many, including the FSB, are pointing out that there are numerous areas where the self-employed do not have access to Government funded benefits. To quantify the changes, a self-employed person with taxable profits of £25,000 will see an increase in their Class 4 NIC between now and 2020 of £338.80 (assuming the current profit exemption levels don’t change). On the positive front, as per last year’s Budget there will be a saving of £145.60 due to the abolition of the Class 2 NIC. from 6 April 2018.
Making tax digital
The mandatory introduction of making tax digital which was due to start in April 2018 has now been delayed until April 2019 for unincorporated businesses and landlords with turnover below the VAT threshold of £85,000.
Business rates
There have been recent changes to business rates and the government have put measures in place to reduce the impact of this change on small and specific businesses. A £1,000 discount in business rate charges will be given to pubs with a rateable value below £100,000 for the next year. Also, businesses facing the loss of small business rates relief will have their increase capped at £50 per month for the next year.
VAT
The VAT registration threshold will increase from £83,000 to £85,000 and the de-registration threshold will increase from £81,000 to £83,000 as from 1 April 2017.
The general reaction to this Budget seems to be that it is having most effect on the self-employed, particularly on the lower to middle income self-employed. There have been lot of changes to taxes affecting small businesses over the last 5 years, to give you an idea of how these changes effect small/medium sized businesses overall, we have prepared some examples below:
Example 1
A typical limited company, owned equally between husband and wife making profits of £150,000 before tax. The husband and wife then withdraw 100% of profits for themselves through salaries and dividends.
For the tax year 2017-18, total Income Tax and Corporation Tax would be £36,519 whereas 5 years ago they would have paid £35,395.
Using the same comparison but with profits after tax of £100,000, combined taxes now would be around £21,065 and 5 years ago would have been £20,000.
We would also point out that since 2012/13, most employers are eligible to receive Employment Allowance which is now worth up to a £3000 per annum saving on Employers NIC.
Example 2
A Sole trade business making profits of £25,000 before tax.
In the 2017/ 2018 tax year, they would pay a combined tax and NIC amount of £4,640 compared to 2012/13 when they would have paid £5,082.35.
If the profits were £45,000 then taxes in the 2017/ 2018 tax year would be £11,039.60 compared to 2012/13 when combined taxes would have been £11,211.
Further Points
There also seems to be a consistent challenge to very small limited company consultant businesses. These businesses are the most effected by the changes to the flat rate VAT regulations previously announced and of course they are also affected by the dividend tax changes. We also understand there will be a continued effort to make IR35 more effective.
Most clients are aware of the changes made in the budget but need to know how they will affect them. Therefore we have provided the examples to give some guidance for values as well as publishing the facts.
We would stress that the examples are therefore only general examples. Some of the changes announced are coming in over the next 2 years, however key tax allowances and rates have not been established for future years, therefore current allowance rates have been used for the purpose of our examples.
Hunts are here to help and guide you through the minefield that is today's taxation regime. To discuss the Spring Budget and how it might affect or benefit your business, please give me a call on 01935 815008 or email nick@huntsaccountants.co.uk
Very best
Nick Hunt FMAAT
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