The Budget 2017, Episode 1 – Our Review
As a child I often struggled to fall asleep on Christmas Eve owing to the excitement of the day that followed. As an accountant, that night was last night, the day before the new Budget was to be delivered… ok, so that last part may not be true, but a new Budget often yields some interesting changes to the UK tax landscape, and this edition is no different.
At first glance, this Budget does appear more streamlined than that of previous years. This may be because it has taken up CrossFit or one of these other fitness trends-of-the-moment, but the more likely explanation is that the Chancellor has one eye on the next Budget which will be delivered in approximately six months’ time. Therefore some planned changes are likely being held back for the first Autumn Budget. However, a number of important changes were announced today, and were clearly designed to target some perceived unfairness in the current tax system.
Below are, in our opinion, the key points from the Budget, along with our thoughts.
- From April 2018, the current 9% rate of Class 4 National Insurance Contributions (NICs) – payable by the self-employed on their profits between £8,060 and £43,000 – will increase to 10%. This will increase further to 11% in April 2019.
In his Budget speech, Philip Hammond explained that this increase was being implemented in order to bring the NICs that the self-employed pay closer to those paid by employees. If NICs were only used for state benefits then this change would be easier to accept, however it is fair to say they have become just another tax, and this increase will adversely affect the self-employed with lower earnings the most.
The only consolation for those who will be affected is that this change represents a maximum increase in Class 4 NICs of £368 over a year. Once the abolition of Class 2 NICs are taken in to account (which is also implemented from April 2018), the maximum extra that will need to be paid is reduced to £220.
Our view: bad news on the whole, however there was speculation of higher increases, so it could have been worse.
Update: Since this article was posted, the Government famously backtracked by scrapping their plans to increase the rate of Class 4 NICs. Whilst this will be good news for the self-employed, others will likely lose out as the Government finds another way of raising this money.
- The Personal Allowance is to increase to £11,500 for the 2017-18 tax year as planned, and increase to £12,500 by 2020.
Our view: increases to the Personal Allowance are always welcomed, however they had been announced in previous statements and Budgets so today was merely confirming the government’s commitment to the changes.
- From April 2018 the tax-free dividend allowance will be reduced from £5,000 to £2,000.
Whilst the increase to Class 4 NICs is intended to reduce the tax gap between the self-employed and employed, this reduction to the dividend allowance is the equivalent for those who operate via their own limited companies. In fact this is a continuation of the changes that came in to force from April 2016 when the dividend allowance was first introduced following the abolition of the dividend tax credit.
The majority of those operating via a limited company will be paying themselves a small salary and a large dividend. For these people, this change will likely increase their dividend income that is taxable at the basic rate, which at 7.5% equates to an additional tax liability of up to £225 per year (the equivalent figures for the higher and additional tax bands are £975 and £1,143 respectively).
Our view: this change is clearly aimed at the contractor industry who have been targeted by HMRC for years due to the tax benefits they can take advantage of, however it will also affect those who either currently run, or plan to run, a small business via a company. Entrepreneurs should be encouraged, and this change is likely to do the opposite as they decide the financial rewards aren’t great enough to outweigh the added stresses and risks they take on.
- Tax-Free Childcare will start to be made available to working parents from April 2017.
Under this scheme (which has been a long time in the making), for every 80p that parents pay in towards childcare, the government will pay in an additional 20p up to a maximum of £2,000 per year per child under the age of 12. To qualify, parents must be in work and each earning more than £115 per week but not more than £100,000 per year.
Our view: this scheme has the potential to help millions of households across the country, however, as with other forms of government relief, its impact will depend on how well it is advertised and whether all eligible parents are aware of its existence.
- Businesses that will be losing small business rates relief will have their business rate increases capped at £50 a month.
Our view: the upcoming increases to business rates have become a hotly debated topic in recent weeks, with many businesses facing very large increases. Whilst this change won’t cover everyone, it is obviously good news for those who it does. Hopefully the additional funds that the Chancellor confirmed would be set aside will ensure those hit hardest are able to stay in business.
- The government confirmed its commitment to reducing the rate of Corporation Tax to 17% by 2020.
Our view: good news – this was another change that we were already aware of, but are glad to see the government is sticking to despite pressures not to.
- From 1 April 2017 the VAT registration threshold will increase to £85,000 and the deregistration threshold to £83,000.
Our view: this is far from the biggest change announced in today’s budget, however it is good news that the government is aware that thresholds do need changing in line with inflation to ensure those running small businesses don’t have to register for VAT and take on the added burden that accompanies it.
Making Tax Digital
- Unincorporated businesses with annual turnover below the VAT registration threshold have until April 2019 before they are required to comply with Making Tax Digital (whereby they will have to use digital software to keep tax records and update HMRC quarterly).
Our view: the Making Tax Digital is an enormous undertaking for HMRC and the government, and if previous public sector IT projects are anything to go by (and they are), then there are likely to be more than a few teething problems. Whether this announcement is an admission of this fact, or the government realising the deadline they set was a little too ambitious we shall never know, but it is good news for those who now have a little more time to prepare.
Overall this Budget didn’t contain too many surprises, and many commentators had speculated that changes were coming for the self-employed and those operating via limited companies. With the government likely to be involved in Brexit negotiations with the EU come the autumn, the second Budget of the year may well introduce the more substantial changes.
Written by Simon Whitehead