We take a look at the highlights and major changes for business owners in Philip Hammond’s Budget 2017.
Click on the link for the full report.
The war on business owners and the self employed continues…
We take a look at the highlights and major changes for business owners in Philip Hammond’s Budget 2017.
Click on the link for the full report.
The war on business owners and the self employed continues…
The Chancellor of the Exchequer, Philip Hammond, has delivered his first Budget, which is also the final Spring Budget. He’ll be back for another one in the Autumn!
The Budget was full of bad new for small business owners.
As from 6th April 2018, the tax-free allowance will be reduced from £5,000 to £2,000. This will mean that director-shareholders will pay an extra £225 on their dividend income. Apparently, Mr Hammond believes this will help deter businesses incorporating purely for tax motives.
This NIC charge on self-employed business profits (not companies) above a certain limit will increase from 9% to 10% in April 2018, and to 11% in April 2019. With the abolition of Class 2 NIC next year, this necessitates the Chancellor closing the NIC gap between the self-employed and the employed, particularly as the self-employed have, since April 2016, been able to access the same State Pension as employees.
Given that the Class 4 NIC charge is to rise to 11% in two years and tax on dividends falling in the basic rate band is only 7.5%, how is this going to make incorporation less attractive?
From 1st April 2017, the VAT registration threshold will increase from £83,000 to £85,000 and the deregistration threshold from £81,000 to £83,000.
The government is considering how the tax system could be made fairer and more coherent, including looking at the taxation of benefits in kind and employer expenses. Consultations will be made in respect of:
Taxation of benefits in kind
Rent-a-room relief that enables owner-occupiers and tenants to earn up to £7,500 tax-free per tax year from the letting of furnished accommodation in their home is to be redesigned to ensure that it is better targeted to support longer term lettings. A consultation paper will be published later.
Unincorporated businesses with a turnover below the VAT threshold will be given a further year’s grace, i.e. until April 2019, to prepare for digital record keeping and quarterly updates. Limited companies are still on course to join MTD in April 2020.
There were no other major changes to the business tax regime.
You can download our Budget 2017 report here.
The Chancellor Philip Hammond announced that his first Autumn Statement will also be his last. In future the main Budget announcements will be made in the autumn rather than the spring. We were not expecting that many tax announcements and many that were made we already knew about. He could not afford too many give-aways as he expects the economy to have a bumpy ride during the BREXIT transition.
There will still be a Budget next March but thereafter the annual Budget will be in the Autumn to allow longer consideration of the announcements and draft legislation before enactment the following summer.
Personal allowance to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
Higher rate tax threshold to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
National Insurance threshold to be raised to £157 a week for employees and employers
Corporation tax rate to reduce to 17% in 2020
Business tax “roadmap” to continue, in particular new rules for company losses
Insurance premium tax to increase from10% to 12% from 1 June 2017
More anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders”
The Chancellor made a number of announcements that were intended to help those families that a just about managing, given the acronym – JAM. Raising the personal allowance to £11,500 and higher rate threshold to £45,000 will mean they pay less income tax and keep more of what they earn.
This group will also benefit from the increase in the National Living Wage to £7.50 an hour and the changes to Universal Credit.
The Universal Credit taper rate will be cut from 65% to 63% from April 2017 which will mean that fewer benefits will be clawed back as claimants’ income increases. The planned reductions in the overall benefits caps will however go ahead.
Many of the corporate tax changes had already been announced and are set out in the business tax “roadmap” which details the government tax strategy for the life of this Parliament and beyond.
The currently 20% corporation tax rate is planned to fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there is talk of a rate as low as 15% in the future.
The Chancellor raised concerns that there continues to be a rise in tax-driven incorporations as there are still tax savings compared to unincorporated businesses operating at a similar level of profit. That may suggest that the government is still considering the introduction of a new “look through entity” suggested by the Office of Tax Simplification so that the tax treatment will be the same, thereby creating a level playing field.
The new flexible corporate tax loss rules announced in the spring budget have been subject to consultation and will go ahead from 1 April 2017.
From 23 November 2016 to 31 March/ 5 April 2019, businesses will be entitled to a 100% First Year Allowance (FYA) for the cost of installing electric charge-point equipment for electric vehicles. This measure is intended to complement the 100% FYA available for low CO2 emission vehicles and to encourage their uptake.
There has been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.
Currently the net effect of pension tax relief for a higher rate taxpayer is that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers the net cost would be just £5,500.
Remember that there is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer. For those with high income this is tapered and can be as low as £10,000.
One new pension restriction that was announced was a measure to limit pension “recycling”. Those individuals who have started drawing down their personal pension will in future only be able to reinvest up to £4,000 in their pension. Please contact us if you want to discuss pension planning further.
Many employers now provide flexible remuneration packages that allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax.
These tax and NIC advantages are to be withdrawn from 6 April 2017. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be excluded; existing arrangements will be protected for a transitional period until April 2018, and existing arrangements for cars, accommodation and school fees will be protected until April 2021.
The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.
An employee who repays to their employer, or ‘makes good’, the cost of a benefit, avoids a tax charge. As previously announced, from April 2017 such making good will have to take place by 6 July in the following tax year if it is to be effective.
As announced in March, from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer’s NIC. Tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked. The first £30,000 of a genuine termination payment will remain exempt from tax and NIC.
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders who have minimal costs who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the flat rate scheme please contact us to check whether this change is likely to affect your business.
The Office of National Statistics has broken down average business turnover in the UK by region. We’ve broken down ONS statistics for our area so you don’t have to.
Plymouth is the “hottest” place to do business in Devon in terms of average business turnover. In fact Plymouth and Exeter are the only places in Devon and Cornwall where businesses achieve, on average, an annual turnover of more than £500,000.
The constituency of Torridge & West Devon is quite “cool” in contrast. It has a larger number of businesses than the two cities, but these are predominately micro-businesses. Torridge & West Devon may have an average annual business turnover of £330,806, but almost half of the area’s businesses turnover less than £100,000 a year. More than a quarter of its businesses turnover less than £50,000 a year.
North Devon has a slightly higher average turnover of £380,796, but its business demographics are remarkably similar to Torridge. Almost half of its businesses turnover less than £100,000 a year, with a quarter turning over less than £50,000.
So does this mean that businesses in Bideford or Barnstaple, say, are destined to be microbusinesses and turnover less £100,000 a year?
We don’t think so.
Around 45% of the businesses in Torridge & West Devon turnover between £100,000 and £1,000,000 a year. The same is true of 48% of the businesses in North Devon, so it can be done.
Would you like to grow your business? Do you want to increase its turnover? Then why not contact us for a free diagnostic review to look at your business potential?
We can help you learn how to increase prices and still attract more customers; how to keep your ideal profitable customers; how to get your customers to spend more and more often; how to create, chase and convert more sales leads; discover your unique selling points; and, educate your customers as to why they should buy from you.
To discover your potential contact us today.
We are delighted to announce that Accountancy Edge has been named as one of the most inspiring accounting firms in the world.
We were awarded the accolade as a result of being selected for inclusion in the new book “The world’s most inspiring accountants” which will be published on 27 April. Announcing our inclusion, chartered accountant Steve Pipe, the book’s author who led the research team said:
“Over a hundred thousand accountancy practices from across the world were eligible, but after a rigorous 18 month research process only 57 of them from 10 countries made the cut. And in fact Accountancy Edge are the only firm in Devon to feature in the book, which is an extraordinary achievement.
It is also a richly deserved accolade, because they really are making a profound difference to their clients, community and the wider world. For example, they helped one entrepreneur to identify what was really important to them. And to make those priorities a reality they then helped him to sell a time-hungry business for the asking price, and replace it by developing a highly profitable and less demanding second business in order to free up much more time to spend with his family. As a result the lives of the entrepreneur and his family are richer in every sense of the word.
Along with the other firms in the book, Accountancy Edge are helping to raise the bar for accountants across the world: inspiring an entire profession, and showing it how to make more of a difference by serving clients better than ever before. And one thing is really clear… the world would be a much better place if more accountants were like them.”
Reacting to their inclusion in the book, Accountancy Edge’s director James Hellyer said:
“We are humbled and proud to be named as one of the world’s most inspiring accountants. We have always believed passionately in the role accountants play in creating a better world by helping to make businesses more successful, creating jobs and generating wealth. So it is wonderful to see our commitment to those things being recognised on a global stage.”
To celebrate their achievement Accountancy Edge are offering readers a free diagnostic review and Key Improvement Possibilities report to identify new ways to add tens if not hundreds of thousands of pounds to their business and personal bank accounts.
The employment allowance increased on 6 April 2016 from £2,000 to £3,000 per employer per year. This is great news for small businesses who can set the allowance against employer’s class 1 NIC payable on their employees’ and directors’ pay.
The bad news is the employment allowance is no longer available to companies where the only employee is a director of that company. This restriction was flagged-up over a year ago, and as a result many micro-companies decided to employ a member of the family for just a few hours to break the “one employee” condition. That second employee doesn’t have to be a director of the company.
The regulations that restrict the employment allowance don’t mention a minimum employment period for the second employee, or a minimum level of income. However, the HMRC guidance for one-person companies specifies that the second employee must be paid above the NIC secondary threshold (£156 per week for 2016/17).
It appears that HMRC have read far more into the regulations than is in the law, and as a result HMRC are imposing conditions by guidance rather than by regulation. HMRC have been asked to correct their guidance to accurately reflect the regulations passed by Parliament.
Tip: If you are the only employee of your limited company and you are a director, and you want to continue to qualify for the employment allowance in 2016/17 the only requirement you have to meet is that the company has two or more employed earners for at least one period in the year (which may be as short as a week). An employed earner is a person gainfully employed in Great Britain under a contract of service, or in an office, with earnings. So employ your partner or child for a week on £156 plus, report it HMRC via your RTI filings, and draw a salary yourself up to the personal allowance.
Traditionally if you are the director of an owner managed company, you would pay yourself a small salary, which is just enough to maintain your National Insurance Contributions records, and extracting profits above that level as a dividend.
To ensure that the year counts for contribution purposes, the salary needs to be at least equal to the lower earnings limit for Class 1 National Insurance contributions (NICs). For 2016/17, this is set at £112 per week – equating to an annual salary at least £5,824 for the tax year.
From 2016/17, the National Insurance employment allowance is no longer available where the only employee of a company is its director. This means that one man companies (such as a typical personal service company) no longer qualify.
The optimal salary for 2016/17 will depend on whether or not the employment allowance is available.
This will be the case in a one-man company where the employee is the sole director (or where the employment allowance is used up elsewhere).
For the purposes of this illustration, we are assuming that the director has no other income besides his salary and dividends, and that the personal allowance is fully available.
The director’s salary that can be paid free of NICs is equal to the lower of the primary and secondary threshold – for 2016/17, this is equal to £8,060 a year. At this level, the salary can also be paid free of tax (as it is covered by the personal allowance). The salary is deductible for corporation tax purposes (generating a tax saving for the company of £1,612).
However, mathematically, a marginally better result can be achieved by paying a salary equal to the secondary threshold of £8,112 per year. Although employee contributions are payable to the extent the salary exceeds £8,060 – giving rise to a NIC bill of £6.24 a year (i.e. 12% (£8,112 – £8,060)), the additional salary in excess of the primary threshold (i.e. £52) is deductible for corporation tax purposes, generating a corporation tax saving of £10.40 (i.e. £52 @ 20%). Consequently, there is an overall saving of £4.16 by paying a salary of £8,112 rather than one of £8,060. However, as this necessitates the hassle of paying primary NICs of £6.24 over to HMRC, it is probably not worth it.
Tip: Where the employment allowance is not available, for practical purposes the optimal salary is £8,060 a year. However, it is possible to save an additional £4.16 by paying a salary of £8,112, but this is perhaps more hassle than it is worth!
This will be the case if there is more than one employee (or the only employee is not also a director). It is assumed that the employment allowance is not fully utilised elsewhere (if you have other employees whose salaries utilise the entire allowance, then you want to pay yourself the figure from scenario 1).
The availability of the employment allowance makes it beneficial to pay a salary equal to the personal allowance – £11,000 for 2016/17. Although employee’s NIC is payable on the salary in excess of the primary threshold (£8,060), the employer’s NIC liability that would otherwise arise on the salary in excess of £8,112 (i.e. £298.54, being 13.8% of £11,000 – £8,112) is covered by the National Insurance employment allowance.
At a salary of £11,000, employee NICs of £352.80 (12% (£11,000 – £8,060)) is payable.
However, as salary is deductible for corporation tax purposes, the additional salary of £2,940 (£11,000 – £8,060) paid in excess of the primary threshold saves corporation tax of £588 (£2,940 @ 20%). This more than outweighs the employee’s NICs of £352.80, generating an overall saving of £235.20.
It is not worth paying a salary in excess of the personal allowance even if the employment allowance is available. Any salary above the personal allowance will be taxable and the combined effect of tax at 20% and employee’s National Insurance at 12% will outweigh the corporation tax saving of 20%.
Tip: If the employment allowance is available, the optimal salary is equal to the personal allowance of £11,000 (assuming this is not utilised elsewhere).
BBC News summarised the main points from Chancellor George Osborne’s Budget statement as follows:
We’re still meeting company directors who haven’t been advised on the most tax efficient way to remunerate themselves from their own limited companies.
Some think they have to pay themselves the National Minimum Wage (directors don’t unless they have an employment contract; they are office holders under the Companies Act and not employees). Others pay themselves a commercial salary as if they were a third party employee. This is almost always tax inefficient!
If you’re the shareholder and director or Company Secretary of your own limited company, then you should pay yourself a small director salary and take the rest of your income out of the company’s post-tax profits as dividends.
The director’s salary has historically been just enough to maintain their National Insurance Contributions record, without being enough to trigger an Income Tax or National Insurance liability. They’ve then been able to take dividends up to the higher rate tax threshold before triggering any personal tax liability.
As in 2014/2015, the £2,000 Employer’s National Insurance means that directors with no other employees can pay themselves up to the personal allowance of £10,600 and only incur a small National Insurance charge (if you have other income, your circumstances will differ).
The personal allowance will be increasing to £10,600. This is much higher than the Lower Earnings Limit for National Insurance purposes, which is where these salaries have previously been pegged.
Rather than waste that extra personal allowance, it makes sense to take the £10,600 as salary in the year-ended 5 April 2016, have your company save £2,120 in Corporation Tax due to that salary, and pay a small amount of National Insurance through PAYE.
Most people with no other income apart from their salary and dividends would have been advised to draw £641 a month in 2013/2014. This goes up from 6 April to £883.33 a month.
Remember, that’s your gross salary, not the net. You’ll take home a little less.
Assuming you have the standard PAYE code for the year, your company will pay you a net amount of £857.97 a month.
It will also have to pay HMRC £25.36 of Class 1 National Insurance a month (this can be paid quarterly).
Provided you don’t have other employees paid enough to trigger an Employer’s National Insurance Contribution, then the £28.61of Employer’s NICs that would have been due every month, will be exempted from payment by the £2,000 Employment Allowance.
All salary payments would need to be processed through the company’s PAYE scheme and HMRC informed with a Real Time Information Return when each payment is made.
If you want the stress of running your monthly payroll taken away from you, then we can help.
Everybody’s circumstances are different. If you have other income sources or are a higher rate taxpayer, then get in touch to find the remuneration strategy that’s right for you.
On Wednesday 8 July, George Osborne presented the first Budget of this Parliament. His speech set out his plans for the next five years ‘to keep moving us from a low wage, high tax, high welfare economy; to the higher wage, lower welfare country we intend to create’.
The government also announced a number of changes to tax credits and Universal Credit as part of the welfare reforms aimed at reducing the growing expenditure in this area.
Our summary focuses on the tax issues likely to affect you, your family and your business. To help you decipher what was announced we have included our own comments. If you have any questions please do not hesitate to contact us for advice.
The Budget proposals may be subject to amendment in a Finance Act. You should contact us before taking any action as a result of the contents of this summary.