As expected, the Spring Budget 2017 was a relatively low key affair with Phillip Hammond primarily taking the opportunity to outline the Government’s plans for future the expenditures across various sectors.
However, there were a few changes announced that will have an impact on the incomes of self-employed and company shareholders in particular, which we have summarised below.
Probably the biggest surprise of the budget was the announcement that the dividend allowance, which was only introduced by Mr Hammond’s predecessor back in 12 months ago, was to be reduced from £5,000 down to £2,000 per annum with effect from 6th April 2018 onwards.
This will result in a small increase in the tax liability of anyone in receipt of more than £5,000 of dividends each year, whether that be through company shares or taxable investment portfolios. Ultimately this will affect many company owners who pay themselves via dividends rather than salary and represents a significant reduction in the tax efficiency of dividends when compared to previous taxation rules.
For example, a basic rate tax payer who received dividend payments of £20,000 would have had no tax liability in 2015/16 (with the dividend being paid net of a 10% tax credit); whilst in 2016/17 a tax liability of £1,125 would be payable. Following the reduction in the dividend allowance from 2018/19, this liability will increase to £1,350.
The aim of the change is to reduce the incentives of incorporation for the sole purpose of reducing tax liabilities and will narrow the taxation gap between company owners and employees.
Self-Employed National Insurance
As predicted by many before the Budget, the Chancellor announced an increase in the rate of Class 4 National Insurance Contributions for self-employed individuals from 9% to 10% in April 2018, with a further increase to 11% in April 2019. It is estimated that this increase will produce an additional £145million in receipts per year from 2021/22 at a cost of approximately 60p per week for those affected.
Again, this measure has been introduced to try and dampen the incentives of becoming a self-employed worker. This is partially born out of many businesses employing dubiously ‘self’ employed individuals to reduce their own liabilities under the workplace pension and national insurance regimes.
- It was confirmed that the Corporation Tax rate will be reduced to 19% as previously outlined in the Autumn Statement
- The ISA allowance will be increased to £20,000 per person with effect from 6th April 2017. This further enhances the efficiency of ISAs with married couples now being able to contribute a combined balance of £40,000 per annum into an entirely tax free investment product.
- The personal allowance for 2017/18 will be increased to £11,500
- The Money Purchase Annual Allowance (MPAA) for those saving into a pension after already drawing benefits will be reduced to £4,000 down from £10,000 per annum from 6th April 2017.
Many have commented that the national insurance increase directly contradicts the Conservative manifesto from 2015 which stated that there would be “No increase to income tax, VAT or national insurance between 2015 and 2020.” However, Mr Hammond is clearly keen to avoid employees being encouraged to become self-employed contractors and the subsequent reduction in potential tax and national insurance incomes for the Government.
Whilst the term ‘self-employed’ has become an increasingly blurred line over recent years, for those who have truly tried to be bold and build a business from scratch, the margins have now become narrower and when paired with the new living wage and costs of auto enrolment many fledgling business owners are now feeling the squeeze more than ever.
If you would like help with any of the changes announced, please feel free to contact us.