29 Mar Spring Budget and A U-Turn
Chancellor Philip Hammond delivered his first… and last Spring Budget on the 8th of March, 2017.
No, he is not being fired, at least not yet. Mr Hammond may set the stage for his own eventual departure with these words…
“This will be the last Spring Budget. The Treasury has helpfully reminded me that I am not the first Chancellor to announce the last Spring Budget. 24 years ago, Norman Lamont also presented what was billed then as the last Spring Budget.
He reported on an economy that was growing faster than any country in the G7, and he committed to continued restraint in public spending. The then Prime Minister described it as the right budget at the right time from the right Chancellor.
What they failed to remind me was that 10 weeks later he was sacked, so wish me luck today.”
Given the furore that followed the budget, the he is going to need all the luck he can get.
Self-employed NIC (National Insurance Contributions) Increase
The issue that got the chancellor into a bit of hot water was the proposal to increase Class 4 NICs paid by the self-employed from 9% to 10% next April and 11% in 2019.
The Chancellor has since decided to drop the proposed increase because it goes against the spirit of the Conservative Party manifesto. He confirmed that, ‘there will be no increases in NICs rates in this Parliament.’
Another key announcement in the budget is the reduction in the dividend allowance. This is the amount of dividends that individual can receive tax-free. From 6th April 2018, dividend allowance will be cut from £5,000 to £2,000 a year.
Impact for owners of Limited Companies:
Our take on this is that the NICs issue is blown out of proportion. The NIC increase for most self-employed people would have had very little if any impact on them. This is because from 6th April 2018, when it was originally suggested that a rise in Class 4 NICs would come into effect, Class 2 NIC payments (the weekly ones) would be abolished. This means that a sole trader with profits of £30,000 for example would only pay an extra £73.80 per annum in tax.* Talk about blown out of proportion!
N.B. Owners of limited companies don’t pay Class 2 and Class 4 NICs, these are only for the self-employed. Instead they pay Class 1 NICs.
And let’s not forget – both the self-employed and limited company owners receive no sick pay, no pension, no medical or protection benefits etc. They have to fund all of these things themselves. There are some 4.7 million self-employed workers in the UK according to the Office of National Statistics.
The reduction in the dividend allowance is more likely to affect small business owners, especially for husband and wife owned businesses whereby they both utilise the dividend allowance. See the article entitled “Why budgeting is beautiful…” for more details on this issue.
These changes underscore why it’s important for self-employed and business owners to seek professional advice (usually via an accountant) and review how best to structure their earnings and tax affairs. Often it depends on the complexity of their business and the level of turnover.
In the light of the Chancellor’s attempted raid on the self-employed (as well as the future reduction in the dividend allowance), I think it’s worth considering how tax on profit differs depending on whether you operate as a sole trader or limited company. There are several factors to consider in choosing a legal structure for a business and tax is only one of them. Generally, it’s more tax efficient to draw profits from as a limited company than as a sole trader.
While a sole trader draws their profit as earned income, which is subject to income tax and NICs above certain levels, a limited company allows a greater control over how and when income is taken. Typically, a director of a limited company draws a nominal salary and then receives additional income in the form of dividends. Dividends are distributed from shareholder funds, or profits after (corporation) tax, so the business has already paid 20%** corporation tax! By keeping one’s salary just below the Primary Threshold, your entitlement to future state pension and benefits are protected even though you don’t actually pay any NICs. Your salary has to be above the LEL (lower earnings limit) to receive a qualifying year for state pension purposes. This is £5,824 in 2016-17 or £112 per week.
The point here is, Hammond’s NI increase was a bit of a red-herring in the first place! While the Chancellor has made a U-turn on his proposal to increase NICs for the self-employed this time, we wouldn’t rule out another U-turn and for this to be revisited in the future.
*Based on 2016-17 rates, the calculation= Level of profits (£30,000) minus the lower profit level (£8,060) multiplied by 1% (the difference between 10% and 9%) minus Class 2 NICs for the year (£145.60, at 52 weeks x £2.80 p.w.)
**Typical rate of corporation tax in 2016-17, reducing to 19% from 1st April 2017.