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Yes, there should be more consideration of the self-employed and micro-businesses by the Government when developing policy. But HMRC are now starting to build our needs into some of their impact assessments progress is possible!
We also do need greater long-term clarity from Government about what the tax strategy is, but let’s not forget we know what personal allowances and Corporation Tax will be doing right up to 2020.
It’s also true that niggling changes to the dividend allowance and the VAT Flat Rate Scheme have increased the tax burden for many a limited company director.
However, when we look at all the changes put together, the picture really is still very positive. We’ve modelled two companies, each with a single company director in a consulting type role. One is a basic rate taxpayer with company income of £43,000 per year, and the other is a higher rate taxpayer with company income of £73,000 per year.
Of course, there are many factors to consider how you approach self-employment, and Crunch will give you a free consultation on your options, but I think it’s important to break out some of the negative talk that’s circulating around self-employment and limited companies. What we can see from each model over the tax years is that while the change in the dividend allowance for 2016/17 was painful, after that the reductions in Corporation Tax and growing personal tax allowance have resulted in a lower tax burden.
Of course, we need to keep making the case to the Government that tax needs to be simple and fair for all, and that complexity is hardest of all for the self-employed to tackle. But the current direction of travel is one which sees Corporation Tax falling again in 2020 (down to 17% from today’s 19%) and the personal tax allowance continuing to rise. So it’s not all bad news.
Indeed, our modelling shows that even when earning annual incomes from £18,000, the vast majority of self-employed will be better off incorporated as a limited company compared to the other options, such as being a sole trader.
It’s still great – there are more people than ever choosing self-employment and half of the jobs growth since 2000 has been from the self-employed. Genuinely working for yourself is a positive choice, which needs to be done with care and thought. Of course, there are challenges, but it’s not as bad as some seem to be claiming. Let us know your thoughts in the comments.
Our modelling assumes single company owner-director paying themselves a salary at National Insurance threshold (e.g. £8,060 in 2015/16) and taking remaining profits through dividends. For future years, we assume allowances and thresholds are as previously announced. We also assume that both companies modelled aren’t VAT registered. If a firm was on the Flat Rate Scheme, the changes will have an impact.
There are advantages and disadvantages to each approach, particularly when it comes to tax issues. Here's what you need to know!