The Chancellor Philip Hammond presented the last Spring Budget on Wednesday 8 March 2017. In his speech the Chancellor was keen to point out that he wanted the tax system to be fair, particularly in relation to the distinction between employed and self-employed individuals. In this article, we look at how the Chancellor’s Spring Budget impacts the small business sector.
In the Budget speech the Chancellor announced that he has requested a report to be delivered in the summer on the wider implications of different employment practices. Also, the Budget included changes to NICs and the Dividend Allowance.
In December and January the government issued a number of the clauses, in draft, of Finance Bill 2017 together with updates on consultations.
The Budget updates some of these previous announcements and also proposes further measures. Some of these changes apply from April 2017 and some take effect at a later date.
Our summary focuses on the issues likely to affect you and your business.
Main Budget tax proposals
Our summary concentrates on the tax measures which include:
- increases to the Class 4 National Insurance rates – Update 15/03/17 – Chancellor withdraws plans to increase NI.
- a reduction in the Dividend Allowance
- changes to the timing of Making Tax Digital for smaller businesses.
Previously announced measures include:
- increases to the personal allowance and basic rate band (a decreased band for Scottish residents)
- the introduction of the Apprenticeship Levy
- changes to corporation tax loss relief
- the introduction of an additional inheritance tax residence nil rate band
- changes for non-UK domiciled individuals.
Main Budget announcements (SME specific)
- Small businesses under VAT threshold have extra year (until 2019) to prepare for Making Tax Digital (MTD)
- Increase in National Insurance Contributions (NICs) – Update 15/03/17 – Chancellor withdraws plans to increase NI.
- Class 2 NICs to be abolished in 2018
- Class 4 NICs will rise to 10% in April 2018 and then to 11% in April 2019.
- Tax-free dividend allowance for individuals of limited companies to reduce from £5,000 to £2,000 from April 2018.
- £435m to support businesses affected by the increase to business rates from April 2017
Small business 2017 Budget impact
A bit of good, but mainly bad news for small businesses
But let’s start with the good news; the delay to the Making Tax Digital (MTD) project until 2019. Understandably, many small businesses were and still are, quite anxious about the introduction of Making Tax Digital. The main reason for the worry was because of the quarterly reporting system – requiring businesses to file, effectively, five tax returns. HMRC haven’t released a great detail about this project so there is still a lot of uncertainty surrounding MTD, along with the extra burden of filing even more tax returns. However, the delay of an extra year is welcome news to small businesses as we prepare for what is undoubtedly a huge change to the way we conduct tax returns.
Another bit of good news is the £435m to support businesses that are affected by the increase to business rates. Therefore, any small business coming out of business rates relief will not pay any more than £600 more in business rates this year, than they did in the previous year.
National Insurance Contributions (NICs) increase
Now for the not so good news; the increase to National Insurance Contributions. Class 2 NICs are currently paid on profits of £5,965 or more and Class 4 NICs at 9% are paid on profits between £8,060 and £43,000. Class 2 NICs are to be abolished from 2018, but Class 4 NICs are going to increase by 1% to 10% in April 2018, and then by a further 1% in April 2019. Only the self-employed will be affected by the new rates, which apply if you have profits above £16,250.
Update 15/03/17 – The Chancellor, Philip Hammond, has withdrawn plans for the proposed National Insurance increases which will come as very welcome news to the self-employed.
Finally, the tax-free dividend allowance is going to decrease from £5,000 to £2,000. The aim of this is to decrease to the tax difference between the self-employed and those working through a company.
Scott Sanderson, Partner at Hawsons, commented: “It’s been a difficult one for small businesses this year. While the delay to MTD is certainly a positive, as is the £435m to support small businesses with the business rates increase, the overall mood of small businesses after the Budget was announced has been a bit glum, and rightly so.”
Scott added: “The decrease to the tax-free dividend comes as a surprise following its introduction from 2016/17 and could have a further impact on whether businesses choose to incorporate or not.”