A very brief summary of the some of the major points from the budget that we think will be of most interest to our clients. If you have any further questions about any of these changes please give us a call. We will put more details on some of these points on our site over the next couple of weeks.
The personal allowances will be increased to £12,500 from April 2019. However the increase to the basic rate band where individuals start paying 40% tax doesn’t apply to Scotland.
Despite the pre-budget speculation, entrepreneurs’ relief will continue. However, the qualifying ownership period has been extended from 12 months to two years. Transitional rules will apply where the claimant’s business ceased before 30 October 2018.
Annual investment allowance
Businesses will now enjoy a higher AIA of £1,000,000 for the two years beginning January 2019, this should encourage capital investment.
Research and development
Refunds arising from research and development claims will be restricted to the PAYE paid by the company. This will restrict the benefit of R&D claims by companies that do not have employees.
The new IR35 rules will not be introduced to the private sector until April 2020 and it will only affect large and medium sized businesses. This will bring the private sector into line with the current public sectors rules.
The main residence relief will be restricted. The final qualifying period of ownership will be reduced to nine months.
The VAT registration threshold will be maintained until 2022.
First introduced in 2000 the IR35 rules (more correctly known as the intermediaries legislation for income tax) have forever since been a source of stress and worry for contractors. Someone who works in a “Personal Service Company” is supposed to do a self assessment as to whether they are caught by the legislation that in effect says that they are a disguised employee. If so they then have to pay a deemed payment to themselves through PAYE as described here: https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment
The practical upshot is that if the deemed payment is applied then the contractor ends up paying the Employer’s and Employee’s National Insurance. Not a scenario most would want. So many contractors assume they are outside IR35 and proceed as such.
Contractors can use HMRC’s CEST tool to try and determine their status. But this tool is potentially not always accurate. HMRC lost yet another tribunal recently https://www.ipse.co.uk/our/news-listing/defeat-puts-to-pasture-hmrc-s-argument-about-moo.html where CEST may well have not reported the answer that the judge found.
Another change came in April 2017 when the Government brought in rules to tighten up the use of contractors in the public sector. The IR35 status decision in Public Sector contracts is now made by the client, not the contractor. The risk of getting the status wrong now resides with the client. This might seem good for the Contractor but in practice has led to the reduction of Public Sector contracts that are available.
If this all seems opaque then there is possibly more to come. The Autumn budget 2017 contained the information that the Government would be consulting about extending the new Public Sector IR35 rules to the private sector. So watch this space!
If you would like common sense advice on a potential or existing contract that you have please give us a call or fill in the contact form below.
The government announced the abolition of Class 2 NI last year.
However as is so often the case the law of unintended consequences kicked in and this week the government announced that Class 2 would not be abolished after all.
One of the consequences of this change was that people with self employed profits below £5965 (18-19 rate) would not receive a credit for that year towards their state pension. Currently a person needs 35 years of National Insurance credit to get the new flat rate state pension. https://www.gov.uk/new-state-pension/how-its-calculated
In this case a person would have to pay Class 3 National Insurance at a rate nearly 5 times the rate of Class 2! So for example if a person was starting a business and made losses in the first year they would either not get a credit towards their state pension or have to pay £761.80 (18-19 rate) in Class 3 contributions.
The U Turn has widely been reported as the reversal of a tax cut for the self employed https://www.independent.co.uk/news/uk/politics/philip-hammond-tax-cut-self-employed-scrap-conservatives-national-insurance-contributions-nic-class-a8526236.html
However for low paid Self Employed workers paying Class 2 NICs is an essential method of ensuring they get the full state pension.
Its nearing the end of the Tax Year! Here are our top tips on year end planning and how to Save Tax.
Director’s salary levels:
Many small business owners pay themselves a small salary and take the rest of their income in dividends in order to be tax efficient. These salary levels should be reviewed every year. There are two critical thresholds that need to be noted for the 18/19 tax year:
- In order to receive a credit for the year towards the State Pension the salary should be above the “Lower Earnings Limit”. This will now be £503 a month. This has the happy outcome of getting a year credit for the state pension without paying any National Insurance.
- In order to be the most tax efficient and avoid paying any National Insurance for the Director the optimum salary is £702 a month. This level can be affected if the Director has Benefits in Kind and depending on how many employees the Company has. If you want personalised advice please get in touch.
Workplace pension minimum contribution up to 5%
For those already running a workplace pension the minimum contributions are set to rise to:
- Employer Contribution 2%
- Staff Contribution 3%
Full details here: http://www.thepensionsregulator.gov.uk/employers/contributions-funding-tax.aspx
Remember for those clients who use us for their payroll we can offer a very cost effective Workplace Pension admin service.
End of Year Tax Planning Items for Companies:
Remember that some Company actions impact Personal Tax. Here are our ideas of the main things you should be thinking about:
- If you are making Company Pension payments then consider making them before the end of the tax year to use the current year’s allowance. This stands at £40,000 a year currently.
- If you are going to declare dividends then consider which Personal Tax year you would like them to fall in to. If you would like them to be in the 17/18 tax year then they should be declared before the 5th of April. The 17/18 tax year is the last year of £5,000 of tax free dividends. The dividend tax allowance falls to £2,000 from April.
End of Year Tax Planning Items for Individuals:
Individuals should be planning for the end of the tax year too. Here are our top tips of what to be thinking about:
- ISA allowances: If you have spare cash the ISA allowances are extremely generous. The current year total is £20,000. Details are here: https://www.gov.uk/individual-savings-accounts
- Personal Pension Payments: Remember if you are making Personal Pension Payments that the level you can contribute is limited by the “Earnings” that you have received. Payments will need to be received by the 5th April to use this year’s allowance. Small business owners should nearly always be paying Pension Payments straight from the Company so this limit is removed.
Major Tax Changes for Next Year:
- New Scottish Tax rates
- Reduction of interest relief on Buy To Let Property
- Remember that the tapering down of higher rate interest relief on Buy To Let Property is continuing. 2018/19 will see it go from 25% to 50%.
Get in Touch:
If you would like any more specific advice on anything in this newsletter please don’t hesitate to get in contact. Keep an eye on our website for news and stories relevant to small business owners. Wishing all our clients a Happy New Tax Year in advance!