Now that the 2016 Budget is done and dusted we have a better picture of all the changes in store for freelancers, contractors and micro-business owners from the beginning of the 2016/17 tax year.
(For changes relating to 2018/19 tax year see our recent article)
Tax rates and allowances
Subject to the Finance Bill 2016 being approved by Parliament this Summer, the headline changes for 2016/17 are:
Dividend tax changes
The way in which dividends are taxed is fundamentally changing to be more akin to how Income Tax is structured. There will be a £5,000 tax-free dividend allowance and increased rates of dividend tax thereafter. Read more about these changes here.
From 6th April the amount of money an individual can earn before incurring Income Tax (the Personal Allowance) will rise to £11,000. George Osborne also announced this will increase further to £11,500 in April 2017.
Income Tax Higher Rate increase
The Higher Rate of Income Tax (40%) threshold will be increasing from £43,000 (2016/17 rate) to £45,000 in April 2017.
Although the Corporation Tax rate remains at 20% for 2016/17, the Chancellor committed to reducing the rate paid by all businesses in the UK to 17% by 2020.
VAT Registration threshold
The Budget confirmed that the VAT Registration threshold will rise to £83,000 from 1st April 2016.
Director’s Loan Accounts
If a Director’s Loan is not repaid within 9 months it is currently subject to a 25% penalty – this rate is increasing to 32.5% in April 2016.
Currently you usually pay tax on your private pension contributions if your pension pots are worth more than the lifetime allowance of £1.25 million. This figure will decrease to £1 million as of April.
A Personal Savings Allowance will be introduced for the 2016/17 tax year, meaning those who pay basic rate tax (earning less than £43,000 a year) won’t have any tax charged on the first £1,000 of savings interest. Higher rate taxpayers are still entitled to the new scheme, but for them the threshold is £500.
The Government explains these changes further here.
The Chancellor also announced in the 2016 Budget the introduction of new Lifetime ISAs, which allow those under 40 years old to save up to £4,000 annually, and receive a 25% top-up from the Government. The regular ISA limit will also rise to £20,000. Both these measures will go live in April 2017.
Currently, employers can reduce their National Insurance Contributions bill by £2,000 by claiming the Employment Allowance. This is increasing to £3,000 – good news for those of you employing staff.
The Government explains this further here.
National Insurance Contributions
The Zero-Rate band of Employer Class 1 National Insurance Contributions for employees under the Age of 21 (and apprentices under the Age of 25), which was introduced last year, is increasing to £827 salary a week.
The Government has also announced it will abolish Class 2 National Insurance Contributions from April 2018, which will be welcomed by sole traders.
New National Living Wage
Not to be confused with the living wage recommended by the Living Wage Foundation (£8.25 for all workers), the Government has increased the minimum wage to £7.20 for over 25’s and called this the National Living Wage.
If HMRC finds that an employer hasn’t paid an employee the minimum wage, it will send the employer a notice for the arrears plus a penalty. Anyone found guilty of this offence may also be disqualified from being a Company Director for up to 15 years.
More on what the new National Living Wage means for SMEs here.
Capital Gains, Entrepreneurs’ Relief & MVLs
As we recently covered, the rules around closing a limited company via a Members Voluntary Liquidation (MVL) are changing – however an announcement in the 2016 Budget may have moved the goalposts.
Closing a business via an MVL allows business owners to take advantage of Entrepreneurs’ Relief, which reduces their rate of Capital Gains Tax to 10% – however the Chancellor reduced the rate of Capital Gains Tax for basic rate taxpayers from 18% to 10% in the 2016 Budget. For higher rate taxpayers the Capital Gains Tax rate will decrease from 28% to 20%.
The rules around “similar trading activities” are still unclear, and it is not yet known how these two legislative changes will interact with one another. Clarification has been promised this month, so we will know the full picture soon.
The wear and tear allowance and the renewals allowance are being changed. For furnished properties the wear and tear allowance will no longer be available, however you can now reclaim expenses for replacing certain items.
The renewal allowance has been repealed, meaning the way landlords claim expenses will be changing. Once HMRC has confirmed details of the new rules we will know more.
The Government is also bringing in a major change around the treatment of interest on capital used to purchase properties for investment purposes (for example buy-to-let mortgages). The interest payments on these loans will no longer attract the full 40% deduction if you are a higher rate taxpayer.
IR35 and Public Sector contracting
Although it was heavily trailed, the reforms announced in the 2016 Budget around the use of limited company contractors in the public sector appear to be slightly updated versions of rules that are already in place, and attempt to shift the responsibility for determining employment status to employment agencies or the end client.
Making Tax Digital
For those who enjoy keeping their tax details up-to-date, the Government is looking to introduce “pay-as-you-go” tax accounts with flexible payment rules, potentially meaning tax can be paid as soon as the income is received, moving tax payments for the self-employed closer to those of PAYE employees. Development of these Making Tax Digital services is expected to continue through 2016.
- Termination payments (redundancy payouts etc.) worth over £30,000 will be subject to National Insurance Contributions from 2018 – something keep an eye on if you plan to use a redundancy package to start a business
- The travel and subsistence expense changes already announced look set to go ahead.
- A new £1,000 “Property and trading income allowance” will be introduced in April 2017 as a tax exemption for people making small sums from, for example, an AirBnB rental. This is separate from the already announced increase in the Rent a Room tax allowance scheme, from £4,250 to £7,500.
- For those purchasing company cars, the Government has announced the 100% First Year Allowance (FYA) will apply for businesses purchasing low emission cars for a further three years, until April 2021.
- From April benefits in kind which are under £50 in value will no longer need to be reported on your P11D.