Issues Affecting Owner-Managed Businesses | 2017 Spring Budget

 

Optimal drawing strategies for owner-managers

As previously announced, the personal allowance increases to £11,500 from April 2017.

Likewise, the higher rate threshold for Income Tax will increase to £45,000.

The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively, with the exception of dividends (remaining at 7.5%, 32.5% and 38.1% respectively).

For the majority of director/shareholders, the following table shows the optimal levels of drawings from April 2017.

All £’s

2017/18

 

Monthly

Annually

Salary

680

8,160

Dividends

3,070

36,840

Total

3,750

45,000

However, due to the change in the way in which dividends are now taxed, the above level of dividends will result in an additional Income Tax liability of £2,137.50, payable through Self-Assessment.

Drawings above this level will result in tax liabilities of at least 32.5% of the additional amount drawn.

The above figures presume no other sources of income personally. Owner-managers who are also self-employed, or who have significant levels of income from other sources, should contact their Principal Adviser for further advice on their optimal drawings strategies from April 2017.

When drawing dividends, make sure you complete the correct paperwork.

 

Dividend allowance reduced

With effect from 6th April 2018, the tax-free dividend allowance will be reduced from £5,000 to just £2,000, meaning an additional £225 in tax per annum for a director/shareholder paying themselves using the suggested drawings above.

Individuals whose other income (before dividends) pushes them into the higher rate tax band will suffer an additional £975 in tax per annum.

There are several options to reduce the impact of this additional tax charge, including additional pension contributions, or tax-incentivised investments such as VCT’s and EIS’s. However, it would be wise for any potential investors to consider the investment risk of these types of investments and speak to an Independent Financial Adviser prior to making any investments.

Please contact your Principal Adviser if you would like to be put in touch with one of the A4G Wealth Independent Financial Advisers.

 

Class 4 National Insurance increase

At the same time of the abolition of Class 2 National Insurance, from 6th April 2018, the rate of Class 4 National Insurance will increase by 1% to 10% for the self-employed.

This announcement will mean that all self-employed individuals earning more than approximately £23,000 will pay marginally more under the new National Insurance regime from April 2018. For example, a self-employed person with profits of around £35,000 will pay roughly £120 more overall in National Insurance than in 2017/18.

An additional increase of 1% on Class 4 National Insurance is planned from 6th April 2019.

 

Making Tax Digital

Following on from George Osborne’s announcement in the March 2015 Budget, many businesses, self-employed people and landlords will need to submit quarterly returns to HMRC from April 2018.

The March 2017 Budget has given a small amount of leeway to those individuals whose turnover is below the VAT threshold (to be £85,000 from 1st April 2017) deferring their registration for Making Tax Digital to April 2019, but most other business owners and landlords need to be prepared for the transition in just over 12 months’ time.

Are you ready? If not, or you are not sure what is involved, check out our recent blog post.

 

National Living Wage

From April 2017, individuals aged 25 and over will be entitled to a National Living Wage of £7.50 – a rise of 30p per hour.

The National Minimum Wage will continue to apply for individuals under 25 years of age, with the rates increasing from 1st October 2016 as follows:

  • 21 to 24 year olds will increase by 10 pence to £7.05 per hour
  • 18 to 20 year olds will increase by 5 pence to £5.60 per hour
  • 16 to 17 year olds will increase by 5 pence to £4.05 per hour
  • Apprentice rate will increase by 10 pence to £3.50 per hour

Any future amendments to the National Living Wage or National Minimum Wage will take place from April each year.

 

VAT Flat Rate Scheme – Limited Cost Traders

Previously announced in the 2016 Autumn Statement, a new 16.5% flat rate will be introduced in April 2017 for businesses declaring their VAT through the VAT Flat Rate Scheme, but who buy limited amounts of goods.

‘Limited costs traders’ are defined as either spending less than 2% of their VAT inclusive turnover, or greater than 2% but less than £1,000 overall per annum, on goods. Expenditure on services (such as utilities, professional fees, subcontractors, etc) is irrelevant.

The intention of this change is to remove the relatively high tax saving incentive for some ‘labour-only’ businesses, and for those affected, all financial benefits of the Flat Rate Scheme will be removed completely.

If you are currently using the VAT Flat Rate Scheme and think you may be caught by these changes, it may be beneficial for you to exit the Flat Rate Scheme prior to 1st April 2017. To find out more, please give one of our Principal Advisers a call.

 

Public Sector Off Payroll Reform

The latest instalment of the legislation commonly known as IR35 is due to come into effect from 6th April 2017 and will potentially affect all individuals working in the public sector – whether through an agency or directly engaged.

The effect of the new legislation is to remove your decision of whether you are treated as a ‘deemed employee’ for tax purposes, passing this decision to the public sector organisation.

If a contractor is deemed to be an employee, all payments to the Personal Service Company will be deemed as being made to the individual worker directly and will be subject to PAYE and National Insurance deductions.

There will be no 5% general expenses allowance available for offset, although it will be let up to the public sector organisation or agency whether to reimburse the worker for any expenses incurred in the role.

We will release further information on any announcements when they are made, but if you have any concerns in the meantime, please contact us.

 

Review of employment practices

It is widely expected in the professional press that should the ‘Public Sector Off Payrolling’ legislation prove effective, an extension of the ‘off-payrolling’ rules could be extended to the private sector.

Whilst this has not been explicitly announced, a Summer review of employment practices in the wider economy may result in contractors in the private sector being targeted through further reforms.

If you are currently providing predominantly your own personal services to your clients, it would be recommended that you undertake a review of your existing working arrangements to ensure that you are not considered a ‘deemed employee’ whether under the existing IR35/PSC legislation or potentially under any extension of the public sector rules.

If you would like to be introduced to a specialist legal adviser in this area, please contact Janice Offer.

 

Infrastructure and Training Investments and Opportunities

The Productivity Gap of the UK – broadly highlighting inefficiencies in UK businesses was again highlighted, with investments in Infrastructure and Innovation totalling £23bn announced in the Autumn Statement being increased. Substantial investments are planned in the following sectors:

  • Science and Technological Innovation
  • Local Government Infrastructure fund in areas of high new housing demand
  • 40,000 new homes per year
  • Transport improvements, primarily looking to combat congestion on the UK roads
  • Digital infrastructure and particularly 5G networks
  • New free schools and investment in existing schools

Any businesses involved in any of these areas would be well advised to seek out any opportunities that they may be able to find as a result.

In addition, the Sainsbury reforms of technical education in 16-19 year olds with the announcement of ‘T-levels’ will further promote the use of apprentices in the coming years. Check out our 2016 Autumn Statement announcement for further details of the Employer’s National Insurance breaks available for apprentices.

 

Research and Development Relief

Businesses involved in the development of science or technology should also consider whether they are eligible for Research and Development Relief. It was additionally announced that there will shortly be a reduction in the administrative burden of making such claims, although detail of how this will be achieved is currently lacking.

However, is your business fit enough to take advantage of any potential opportunities? If not, perhaps you should consider your business plan and finding the best way to maximise the potential of your business. Speak to your Principal Adviser to find out more.

 

Business Rates Reform

A prominent news story in the last few weeks, commercial properties are subject to a revaluation from 1st April 2017 with business rates therefore likely to be hiked for many businesses.

However, there were a number of reliefs previously announced in the 2016 Budget, which will help a number of smaller businesses such as the permanent extension of full Small Business Rate Relief to businesses occupying properties with a rateable value of up to £12,000 with effect from 1st April 2017 (up from £6,000).

Philip Hammond further announced in the 2017 Spring Budget that small businesses that lose the Small Business Rate Relief will have any increases in their bills capped at the higher of £600 per annum or the transitional relief limit that should be automatically adjusted by your local council.

To claim Small Business Rate Relief, you should contact your local council.

 

Corporation Tax Rates

No major changes were announced in respect of Corporation Tax with further confirmation that the rate of Corporation Tax will fall to 19% from April 2017, and 17% from April 2020.

This may mean that sole traders and partnerships with lower profits may seek to incorporate rather than remain as self-employed to take advantage of both limited liability and the reduction in the tax rate.

Despite the reduction in the dividend allowance from April 2018, the increase in Class 4 National Insurance is likely to outweigh the additional tax on dividends for many self-employed with earnings above c£40,000.

If you are currently trading as a sole trader or partnership, and wish to consider whether incorporation is right for you, why not give one of our Principal Advisers a call?