From understanding expenses to starting a limited company, our downloadable business guides can help you.
Should the self-employed be up in arms over what some papers are calling the Chancellor’s “raid” on their taxes? Was Hammond’s Budget a signal against entrepreneurialism and self-starters? For some types of business it will certainly feel that way, especially those suffering from the business rates increases. In many respects the biggest problem was around timing, the pain wasn’t delivered at the same time as the positives they are helping to pay for.
There were three main announcements which will affect the self-employed and small businesses. Let’s have a look at each in turn to see whether they deserve some or all of the fiery words the media have belched at them…
The Government are changing how National Insurance Contributions (NICs) are paid by the self-employed, often known as sole traders. Firstly, as was announced previously, Class 2 NICs are being abolished. They were an odd and regressive class of NICs which those earning over £5,965 had to pay. Their administration was also fiddly and confusing, so confirmation of their departure is very welcome.
The newly announced change is that the Class 4 NICs paid by those self-employed earning over £8,060 a year will rise from 9% to 10% in April 2018 and to 11% in April 2019. It’s important to remember that thanks to ongoing increases in the personal tax allowance only the self-employed earning over £16,250 will end up paying more after these changes.
By comparison, the Class 1 NICs paid by employees are at 12%. So the gap between what is paid by an employee and the self-employed is narrowing. This direction of travel for NICs reform was suggested in our work with the RSA earlier this year, though we wanted them to be tied to improved parental support. This measure has also been backed by other leading think tanks the IFS and Resolution Foundation.
IFS chart showing (black line) how Spring Budget 2017 NICs changes are progressive: They benefit lower earners at the expense of higher earning self-employed.
Now, of course few people celebrate their tax burden rising. But… we know that the self-employed in general don’t save nearly enough for their retirements. So it was particularly significant that the self-employed gained eligibility for the Single State Pension in April 2016, an important and generous new welfare provision they hadn’t previously been able to access. This generosity needs to be paid for in some way and now we see how the Chancellor plans to do that.
It would have been much easier to connect the two explicitly back in April 2016 or even earlier when these pension changes were being set out. But perhaps Treasury had not anticipated the scale of growth in self-employment back then so wasn’t able to forecast the growing cost of this pension change. We don’t know and the political price of not making that connection is now being paid by the Government.
It was also very welcome, as we had proposed in our research with the RSA, to hear the Chancellor commit to a summer 2017 consultation on parental benefits for the self-employed, hopefully resulting in further support being granted to self-employed parents. Still, it would have been far better to do this consultative work before announcing the NICs increases.
There will be some in the self-employment community who argue that they oppose all moves to increase taxes as they would rather keep the profits of their labours to spend as they choose. It’s an understandable view but one that doesn’t wash in the long term.
The self-employed aren’t saving enough, and the tax differential with employees was far greater than the difference in entitlements. The public purse will have to support aging generations whether self-employed or not. It’s right that this burden is shared, even if the timing of these changes should have been far better managed.
In the coming months we will be making the case for far stronger parental rights for the self-employed among other benefits.
The shakeup to dividend income tax from April 2016, which hiked up all the rates whilst creating a new £5,000 tax-free allowance had investors and company directors deeply concerned. As we highlighted in our analysis at the time, the transition from the old regime to this new system was especially harsh for lower earning small companies.
The Chancellor yesterday tightening the tax-free allowance after only a year was surprising but perhaps inevitable given the constraints the Chancellor is working to. For whatever reason the Government remain firmly committed to cutting Corporation Tax down to 17% by 2020 and the main headline taxes are all ‘locked’ by legislation, so can’t change before 2020.
I imagine the Chancellor will have considered that cutting the Dividend Tax Allowance would have been a simple way to boost tax revenues without hitting too many ‘ordinary voters’. But for entrepreneurial business owners this feels like death by a thousand cuts… every few months another measure such as this, or the ‘limited cost trader’ VAT Flat Rate Scheme, means they will take home less money from their work and have to do even more to understand their tax planning.
Ultimately there was little justification for creating a new tax allowance just for dividend income. A perfectly reasonable criticism of the Osborne years has to be that he allowed far too many special tax allowances to be created. This led to complexity and confusion, as well as a raft allowances which only the better off could make full use of.
Company directors have full use of their personal allowance for dividend income, so the special allowance was confusing – and at Crunch we had to spend a lot of time sifting through HMRC’s fine print to understand how the two allowances interact.
The problem from HMRC’s perspective was that by abolishing the zero rate band for dividend tax they were pushing a whole range of very small-scale shareholders, investors and company directors into the tax system. The administrative burdens for them and government would far outweigh any tax raised. Perhaps Making Tax Digital will eliminate those burdens, but until then some notionally zero-rated allowance or band will have to remain for dividends.
I think most small businesses are open to the idea of debating what paying their fair share looks like. The difficulty they will have is that debate isn’t happening with government in an open and inclusive way. There’s the Government’s fetishisation of the Corporation Tax rate, to the benefit of the big corporates and multi-nationals, meanwhile the smaller firms with the least capacity to absorb and understand changes feel measures are raining down on them.
We will be renewing our campaigning efforts on dividend taxes, asking MPs to leave them well alone!
Unfortunately ‘muddling through’ is all too often how the British cope with major policy challenges. Business rates are the epitome of such muddles: As a system of taxation rates are widely acknowledged to be in desperate need of a major rethink. Our work with the RSA highlighted a number of possible options to replace business rates with, including revenue rates and land value taxation.
Sadly rather than tackling the fundamental issues, year after year we have seen a number of ‘quick fixes’ which have only kicked the can down the road. Delaying the rates revaluations, transitional reliefs and discretionary funds all serve to disguise and distort the problems in the business rates system. Yet, fearful of major reform in the shadow of Brexit, the Chancellor once again reached for the worn old tools of transitional reliefs and discretionary funds. The many voices who were loudly protesting the rates changes before the Budget should keep up the pressure demanding reform. Being bought off with the current sprinkling of offerings would be to give up too soon.
If there is a case for the self-employed and small businesses to feel utterly let down by government, then business rates have to be it. It’s astonishing that despite years of campaigning and research on the problems with rates, we still are left with short-termist tweaks to a creaking system.
Economic shifts, especially towards e-commerce, are fundamental reasons why business rates desperately need a rethink. That this still hasn’t happened is deeply disappointing, but also a sign of the huge political risk that lies behind reforming this big old beast of a system which hits every constituency across the nation in unique and challenging ways.
Owner-operator company directors also have reason to be deeply disappointed by the further changes in the dividend income tax system. The change will cost a basic rate tax payer around £225 more a year in tax, which isn’t alone an excessive change. But in the wider context of tweaks every few months, all at the expense of the small business, does this once again raise the question of why corporation tax cuts are being put above the needs of all else?
It’s ironic that the greatest sound and fury in the media is being reserved for the National Insurance changes which are the most justifiable of the major changes announced. Yes, the timing could have been much better to more clearly connect the NICs rise with the state pension eligibility and parental support. Was a manifesto promise broken in making these changes? Maybe. Are the NICs changes progressive and long overdue? Yes. So let’s focus our attention on the real problems in the budget, not what others would have us believe. That’s what we’ll be doing in our campaigning over the coming months.
We’re fast approaching the end of the tax year on 5th April, and now is usually a good time to get to grips with any tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year. You’ll also want to stay up-to-date with the rates and thresholds.
Business mileage is an important – but often overlooked – expense for freelancers and contractors. In short, this is good news for you and your company.