Recent government announcements have left the UK’s self-employed population with little to smile about and, sadly, the Chancellor’s latest Budget was no exception. Here are five areas where small businesses and freelancers will be most affected:
1. Making Tax Digital
The biggest shake-up to the UK’s tax system for a generation became a little clearer with the decision that businesses below the VAT threshold would have an extra year to prepare. With the de minimis threshold set at £10,000, companies with annual sales above this but below the VAT threshold will now have until 2019 before Making Tax Digital kicks in. However, companies with annual sales above the VAT threshold will still have to comply by next year.
The fact that the de minimis threshold remains at £10,000 means that some businesses will be caught in the unusual position of being under the Personal Allowance, therefore having no tax to pay, but over the MTD threshold, thus having to report their business finances quarterly to HMRC via digital tax software.
You can find out more about the initiative and how it will affect you with FreeAgent’s Making Tax Digital guides and resources.
2. National Insurance Contributions
We already knew that Class 2 National Insurance Contributions (NICs) are being abolished in April 2018. Still, in the Budget the Chancellor announced that when they go, Class 4 NICs will increase from 9% to 10%, with a further increase of 1% planned the following year. As a result, all sole traders and partners whose profit exceeds £16,250 a year will see their NIC bills increase overall.
This change could have an impact on self-employed entitlements to State Benefits, such as the State Pension, as these are currently paid for through Class 2 NICs. It remains to be seen how the new arrangements will affect this.
3. Dividend Allowance
Limited company shareholders can currently receive up to £5,000 in dividend income tax-free. However, this will fall to £2,000 from April 2018. The result is that limited company director/shareholders who take a low salary from their company and make the rest up with dividend payments will pay more tax.
4. Cash basis accounting
The Budget report also confirmed that more freelancers would be able to prepare their businesses’ accounts on the cash basis. The cash basis allows some firms to work out their profit based on when money comes in and goes out, rather than when income is earned and costs are incurred. For example, you would count income from when an invoice is paid, rather than when it was issued. From 6th April 2017, unincorporated businesses (i.e. sole traders and partnerships) can start using the cash basis if their sales are under £150,000 a year, and if they’re already using it, continue to do so until their sales reach £300,000 a year. Currently, the threshold is £83,000.
5. VAT threshold
The Budget announcement also confirmed that the VAT registration threshold will increase from £83,000 to £85,000 on 1st April 2017. The threshold for de-registering for VAT will also increase from £81,000 to £83,000 at the same time.
Another lousy deal for small businesses freelancers
Overall, this year’s budget was disappointing for the UK’s self-employed and freelancers. The government seem determined to label this group as tax-avoiders despite their significant contributions to the UK’s economy and flexibility of the labour market.
In attempting to tax those who run their own business the same as employees, the additional risks and limited entitlements that the UK’s small business owners and freelancers endure are conveniently overlooked.
This article was written by Emily Coltman, Chief Accountant at FreeAgent, the online accounting software specially designed for freelancers, contractors and micro-businesses, covering everything from invoicing to tax. Emily features in A Field Guide to Freelancer Finances, a free ebook of business finance tips – download your copy.