Today’s Budget announcement by the Chancellor, Philip Hammond, may have included one or two attempts at humour, but there was sadly little for freelancers and contractors to laugh about in what was ultimately a pretty gloomy announcement for them. Here are the key changes that will affect freelancers and small business owners:
Sole traders and partners: increase in Class 4 NICs
Update: the government announced on 15th March 2017 that they will not proceed with the National Insurance increases outlined in this section.
When Class 2 National Insurance is abolished in April 2018, Class 4 National Insurance Contributions (or NICs) will increase from 9% to 10%, with a further 1% increase planned in April 2019. As a result of these changes, sole traders and partners whose profit (or profit share) exceeds £16,250 a year will see their NIC bills increase overall.
As Class 2 NICs - which will be abolished next year - currently entitle individuals to State Pension and other benefits, it remains to be seen how their entitlement will be affected by the new arrangements.
Limited company directors/shareholders: reduction in dividend allowance
At the moment, any individual may receive up to £5,000 in tax-free dividend income each year; however, the Chancellor announced today that this allowance will fall to £2,000 from April 2018. As a result, company directors/shareholders who take a low salary from their company and make up the rest of their income with dividends will pay more tax on that income.
Making Tax Digital: a one-year delay for smaller businesses
For sole traders and partnerships with annual sales that are above £10,000 but below the VAT registration threshold, the timeline for Making Tax Digital (MTD) implementation has been pushed back from April 2018 to April 2019. This will give these businesses more time to prepare for the forthcoming changes.
The fact that the £10,000 threshold has been left unaltered means that a number of businesses whose profits fall under the personal allowance, and who therefore pay no tax, will have to make quarterly reports under MTD.
Increase of cash basis availability
The full Budget report also confirmed that more unincorporated businesses will be able to prepare their businesses’ accounts on the cash basis. The thresholds will increase from 6th April 2017, so that businesses can start using the cash basis if their sales are under £150,000 a year, and if they are already using it, continue to do so until their sales reach £300,000 a year.
VAT threshold increase
We also learned today that the VAT registration threshold will increase from £83,000 to £85,000 on 1st April 2017. The threshold for de-registering for VAT will see a corresponding increase from £81,000 to £83,000 at the same time.
Hints towards the future?
As he announced support for business rates, the Chancellor made a remark about “making tax fairer for businesses that don’t use bricks and mortar”. Whether this was a reference to the reduction in the dividend tax allowance or, given that freelancers typically don’t have a business base other than their home, to a future tax break for working from home, we do not yet know.
The Employment Allowance, according to the full Budget report, is currently being monitored following reports of some businesses “using avoidance schemes to avoid paying the correct amount of NICs”. Entitlement to the Employment Allowance has already been removed from solo companies and this news could mean that we may yet see further restrictions in the future.
On the whole, this has been a disappointing Budget for the UK’s freelancers and self-employed, who contribute significantly to the the UK economy and to the flexibility of the UK labour market. It is unfortunate that the government is determined to label genuine freelancers and contractors as tax-avoiders, and is attempting to tax them at the same level as employees.
In doing so, the government conveniently overlooks the additional risks and reduced entitlements associated with running your own business, which we at FreeAgent think is unfair and wrong.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.