So, yesterday we heard from Mr Osbourne that he’s giving the nation a pay-rise. Well done sir, we applaud you. Or do we? Here at MAF, we’ve taken a look at what difference it will make to the UK’s contractors, freelancers and small business owners.
What did our pal George do for us then? Here are the key-issues that will affect contractors, freelancers and small business owners, broken down in simple terms.
Corporation tax will be cut to 19% in 2017 and 18% in 2020.
Good job, George! Corporation tax is coming down incrementally over the next 5 years – hurrah!
In a nutshell, this means more profit stays in the company, so there’s more money available to you as a company director or shareholder to take in dividends or to invest. Thumbs up, it seems, but it’s not all rosy.
Contractors who are the sole employees of their own limited company will be prevented from claiming the NICs Employment Allowance.
Under the current scheme, any contractor operating a personal service company (PSC) can offset the £2,000 allowance against employers’ National Insurance Contributions arising on ordinary salary. To put that in everyday terms, PSC contractors (single director/ employee company) who pay themselves any salary are currently entitled to claim the Employment Allowance if they have actually paid any employers’ NIC. But this will be no more! However…
The personal allowance goes up to £11,000 from next year. The threshold at which the higher rate kicks in will go up to £43,000.
Nice one, George! This means your new take-home pay could be made up of £11,000 per annum in salary and £32,000 per annum in dividends before having to pay the higher rates of income tax. Yes, a little bit more cash in your pocket! But…
Dividends will work under a new system as of 2016/17.
The dividend 10% tax credit will be replaced with a new £5000 tax-free allowance. What this means is that any dividend income over £5000 will be taxed at 7.5%. The rates of dividend tax will then be 7.5%, 32.5% and 38.1. Hmmmpf.
A couple of other things to note
Employment intermediaries and tax relief for travel and subsistence
As announced in the March Budget 2015, the government has published a consultation document alongside the Summer Budget, detailing proposals to restrict tax relief on travel and subsistence for workers engaged through an employment intermediary (an umbrella company or a personal service company). The changes will take effect from April 6, 2016. (Finance Bill 2016)
The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation also known as IR35, designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015.
Some positives to come out of this bold budget: its the end of ‘take home pay’ calculators and average accountants. Tax planning is an art and there is never a ‘one size fits all’ solution. This budget is testament to that and you need to make sure you have the right accountant looking after your books.
If you’d like a friendly chat with My Accountant Friend, one of our expert advisors will be more than happy to talk through your situation.