Autumn Statement 2016

Published: 24 Nov 2016

 

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Autumn Statment 2016The newly appointed chancellor’s speech yesterday included many confirmations about the tax changes announced by his predecessor, Mr Osbourne.  However, the full report introduced an alteration to the flat rate scheme that will have a significant impact for contractors and other self-employed individuals.

 

Flat rate scheme to end for most contractors

Corporation tax

National Insurance

Personal allowance and higher rate tax

Salary sacrifice

Savings

Switching of Autumn and Spring announcements

 

Flat rate scheme to end for most contractors

 

The Autumn Statement brought an increase in the flat rate scheme to 16.8%.  The new percentage will apply to most contractors, regardless of their business activity.  Since the percentage is applied to VAT inclusive turnover, a flat rate scheme trader will now pay 19.8% of the 20% VAT collected.  This 0.2% benefit will effectively cancel the tax benefit of using the scheme.

 

The new percentages take effect from 1 April 2017.  At that point, most traders will be better off using standard VAT accounting, and recovering VAT on expenses.  For many, the accounting cost and hassle of being VAT registered will not outweigh any VAT recovery on expenses.  Traders registered voluntarily should consider VAT deregistration.

 

The flat rate scheme currently ranges between 11% and 14.5% for most businesses.  The highest percentage a trader can currently pay is 14.5%.  However, a contractor providing services typically has has relatively 'low costs' relative to providing services.  Only business that are not ‘low cost traders’ will be exempt from the new rules.  To continue to use the lower flat rate percentage, a business has to spend at least 2% of turnover on goods.  Goods in this case exclude:

 

  • Any services (such as telephone, rent, professional fees, insurance and sub-contractor costs.)
  • Capital items, (such as computer equipment and office furniture.)
  • Vehicles, vans and other motor expenses.
  • Food and drink consumed by the business. 

 

Even where the 2% test is met, a trader will not be excepted unless total expenditure on goods exceeds £1,000 per year.

 

Retailers, restaurants and other business with high cost of sales will, by and large, meet the test.  For IT contractors, management consultants and other service providers, the flat rate scheme is unlikely to be of any practical use.  For instance, it is remote that stationery and office consumables will comprise 2% of turnover.

 

Corporation tax

 

The Chancellor confirmed plans to lower corporation tax to 19% in April 2017 and eventually to 17% by April 2020.  The rate by 2020 is expected to give Britain the lowest company tax in the G20.

 

National Insurance

 

The employer’s (or secondary) national insurance limit will be slightly increased so that it is the same as the employees’ (or primary) national insurance limit.  The two thresholds will be aligned at £157 a week with effect from April 2017.  The change would not result in any extra tax liability for an employee.  The extra liability for an employer would be no more than £7.18 a week per employee.  The alignment is intended to simplify national insurance.

 

As announced in the 2016 Budget, Class 2 National Insurance Contributions, payable by self-employed people, will be abolished from April 2018.  A further Budget announcement confirmed is the liability of termination payments over £30,000 to national insurance.  The measure also takes effect in April 2018.

 

Personal allowance and higher rate tax

 

The government confirmed the previous announcement that the personal allowance will rise to £11,500 in 2017-18 and again to £12,500 by April 2020.  The higher rate tax threshold is also set to increase from £42,000 (in 2016/17) to £45,000 next tax year and eventually to £50,000 by 2020.  Following this, the personal allowance threshold will rise in line with the CPI measure of inflation.

 

Salary sacrifice

 

Salary sacrifice scheme describe an arrangement where an employee foregoes pay in order to receive some benefit.  Employee do not have to pay national insurance o benefits and therefore the scheme can bring a tax advantage.  Depending on the rate of an employee’s national insurance, a benefit could be as much as 12% cheaper if paid by salary sacrifice than out of take home pay.

 

The Autumn statement announced an axing of perks, such as gym and private healthcare memberships and smartphones from salary sacrifice.  Nonetheless, a tax benefit will still arise from sacrificing pay in favour of:

 

 

Therefore pension and childcare, which are the most common, benefit will not be affected by the new rules.

 

Savings

 

Further reiterations of the measures to be introduced in April 2017 included:

Increase ISA limit from £15,240 to £20,000 in April 2017.

Savings starting rate of £5,000 to remain in 2017/18

A new allowance of £1,000 each for trading and for property income.

 

Switching of Autumn and Spring announcements

 

The major fiscal announcements have until now been made in the Spring.  The Spring Budget will be replaced with an Autumn Budget, with the effect that 2017 will contain two Budget dates.  The reasoning behind the change is to announce tax changes further ahead of their implementation on 5 April.

 

The Autumn Statement will be replaced with a Spring Statement, the first of which will be in 2018.  The statements are presented as less major, although the impact of changes will vary from one taxpayer to the next.

 

2016-17 Contract company changes illustrated

Published: 17 Mar 2016

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The emergency Budget of 2015 introduced rates of tax for dividends which had repercussions for contractors trading via a company and other owner-managed businesses.

 

Prior to 2016-17 there was often a clear tax benefit to forming a company compared with invoicing as a sole trader. This is because, unlike a sole trader, a company owner could take profits as dividend and thereby avoid national insurance.

 

The example below takes a company with profits after deduction of director’s salary of £90,000. Using the corporation tax rate for 2015-16 and 2016-17 which is 20%, profits available as dividend would be £72,000. In this case, the director receives a salary up to the national insurance threshold of £8,060 and withdraws all remaining profit as dividend.

 

Limited company calculation

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Director’s salary   8,060   8,060
Gross dividend*   80,000   72,000
Personal allowance   (10,600)  

(11,000)

Dividend allowance       (5,000)
Taxable income   77,460   64,060
  Income Tax Income Tax
2015-16 @ 10% basic rate 31,785 3,178.50    
2016-17 @ 7.5% basic rate     32,000 2,400.00
2015-16 @ 32.5% higher rate 45,675 14,844.38    
2016-17 @ 32.5% higher rate     32,060 10,419.50
Tax credit   (7,746.00)    
Totals 77,460 10,276.88 64,060 12,819.50

 

Note in 2015/16 the dividend is grossed up by 100/90. Grossing up does not occur under the new rules.

 

Adding the corporation tax payable of £18,000, the overall tax burden increases from £28,276.88, to £30,819.50.  This tax is calculated on a profit, before salary of £98,060.

 

Sole trader illustration

 

The following table illustrates the tax implications of the same individual trading as an unincorporated business

 

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Profits   98,060   98,060
Personal allowance   (10,600)  

(11,000)

Taxable income   87,460  

87,060

  Income Tax Income Tax
Income tax @ 20% basic rate 31,785 6,357.00 32,000 6,400.00 
Income tax @ 40% higher rate 55,675  22,270.00 55,060 22,024.00
Subtotal 87,460   87,060   
National insurance @ 0% 8,060   8,060   
National insurance @ 9% 34,325 3,089.25  34,000 3,060.00 
National insurance @ 2% 55,675 

1,113.50 

56,000 1,120.00
Totals 98,060 32,829.75 98,060 32,604.00

 

It can therefore be noted form the above that while a sole trader tax liability has not changed considerably in 2016-17, a company contractor now has a burden about the same as that of a sole trader.

 

Personal allowance abatement

 

 

Income over £100,000 would normally result in abatement of personal allowance. A sole traderdreach this abatementold with lower income than a contractor company. This is because corporation tax is deducted from income subject to income tax.

 

The tax benefit of a company compared with a sole trader will be significant if the profits in the above example were increased by say £10,000.

 

 

Benefits a limited company

 

 

Where the shareholder pays another person from their income a shareholder could be added so as to effectively double the £5,000 dividend allowance. A typical situation would be where household costs are shared with a spouse, who has no other dividend income.

 

 

The rate of corporation tax drops to 19% on March 2017 and again to 17% in March 2019. Therefore, the tax benefit of company compared with sole trader will become clearer.

 

 

It is not necessary to withdraw all remaining profit as dividend. Alternative could be to accumulate profits in the company and extract these as capital gains on eventual disposal of the company.

 

 

In the approach to the 2016-17 Budget the government entered a consultation on the abolition of entrepreneur’s relief for contractor companies. However this capital gains tax relief has remained intact.

 

 

The protection of limited liability which derives from using a separate entity through which to contract often suits both sides of the arrangement for non-tax benefits.

 

 

On account of the above, it can be maintained that a company pulls more credibility.

Autumn statement 2015

Published: 26 Nov 2015

 

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A round-up of the Chancellor’s Autumn Statement made yesterday:

 

  • From 1 April 2016, a stamp duty land tax rate of 3% will be introduced on the second property a person owns. This would include secondary residences and buy-to-let investments. The rate will not apply to property developer using a company to make a purchase.
  • From 2019, any capital gains on disposal of a property will need to be reported within 30 days of the completion date.
  • The Small business rate relief has been extended for a further year.
  • The state pension will increase to £119.30 a week from April 2016.
  • There were no announcements about the leaked proposal for Personal Service Companies.
  • ‘Help to Buy’ and Shared Ownership’ schemes were outlined.
  • A digital tax account which is schedule to be introduced by 2020 is intended to replace the existing Tax Return system.

2016 Budget

Published: 16 Mar 2016

 

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2016_BudgetMr Osborne delivered his eighth Budget as Chancellor at round 12.30pm today.  The Budget was announced against a backdrop of slowing global growth, recent interest rate cuts by central banks into negative territory and the forthcoming EU referendum in Britain.  The first two Budgets of our current government have been far reaching and full of surprises. This contrasts with the Budgets of the preceding coalition government which tended to alter very little.

 

The overviews below follow the chronological order in which the announcements were made, with some supporting explanation.

 

Loans to participators

Termination payments

Diverted Profits Tax (Large companies)

Corporation tax fall

Tax relief for ‘micro-entrepreneurs’

Business rates drop

Stamp duty on commercial property

Indirect taxes mixed

Class 2 NICs

Capital gains tax cut

Entrepreneur’s relief for investment in small companies

Chancellor silent on entrepreneur’s relief restriction for contractor companies

Lifetime ISA of £4,000 a year for the under 40s.

Personal allowance and tax threshold up next year

Author’s note

 

Loans to participators

 

From 6 April 2016, the charge for a loan to a participator will increase from its current rate of 25% to a new rate of 32.5%.  A participator is typically a shareholder or director of a company with five or fewer owners.  Directors of a one-person or ‘contractor company’ and family owned business will usually be participators.

 

A full summary of the rules can be read here in the article about overdrawn director’s loan accounts.  In brief, where a contractor has not retained sufficient funds in the company at the year end to cover corporation tax, it will be a requirement to lend money as a director.  This loan gives rise to a tax charge.

 

Company funds are usually represented by the company bank account, however amounts owed from clients and equipment and other assets brought into the business can also be used as a buffer.

 

If the bank account is brought back into balance in future years, the charge can be repaid by HMRC.  However there is a cash flow drawback and an administrative burden of borrowing money from the company.

 

Termination payments

 

Payments on termination of an employment contract receive preferential tax treatment, provided the payments are not an entitlement under the employment contract.  Under current legislation a termination payment is not subject to employer’s national insurance and the first £30,000 will not be subject to income tax in the hands of the employee.

 

From 6 April 2018, many termination payments over £30,000 will be subject to employer’s National Insurance.

 

This measure has the purpose of an anti-avoidance provision.

 

Diverted Profits Tax (Large companies)

 

A series of new rules are scheduled to be introduced to bring profits derived from the UK into the charge of UK corporation tax.  The measures are aimed at companies with profits of over £5 million.

 

The rules will have most impact on multi-national organisations with that particular scope to structure finances so group profits are taxed in jurisdictions with lower than average rates.

 

For most companies, the deduction from profits chargeable to corporation tax for interest payments will be restricted to 30% of UK income.

 

Only 50% of current year profits can be reduced by losses brought forward from previous years.

 

The tightening of rules on withholding tax for royalty payments and other measures will also be presented.

 

Corporation tax fall

 

Following previous announcements, the corporation tax, which is currently 20%, was due to fall to 19% in April 2017 and to 18% in April 2020.  The Chancellor announced that the rate will now be reduced further to 16% in 2020.

 

Tax relief for ‘micro-entrepreneurs’

 

Traders and landlords with less than £1,000 will not need to declare this income on a Tax Return.  The income will be tax free.  This will particularly benefit vendors with a side-line on websites such as E-Bay and AirBnB.  Traders bringing in more than £1,000 income can deduct the allowance from their income profits, instead of actual expenses.  A total of £2,000 can be exempted from tax, one allowance for property income and the other for trading.

 

Business rates drop

 

From April 2017, small business rate relief will be increase.  The relief currently exempts businesses with a rateable value of £6,000, however this is set to increase to £12,000 from next year.  The higher rate threshold will also increase at the same time from £18,000 to £51,000.

 

Stamp duty on commercial property

 

With effect from midnight, the chancellor has brought the stamp duty system for commercial property in line with that for residential property.  The tiered system will mean that no stamp duty is payable on a property worth £150,000 or less, 2% is paid on consideration between £150,000 and £250,000 and 5% is levied on the value of the property which exceeds £250,000.

 

With the stated aim of helping “small firms”, the new duty will benefit all but purchasers of the highest value property.

 

Indirect taxes mixed

 

  • Levy on sugary drinks
  • Fuel duty freeze (despite lower petrol prices on account of the recent oil glut.)
  • Tobacco duty rise.
  • Freeze on beer, cider, whisky and other spirits duty with other alcohol taxes rising.

 

Class 2 NICs

 

Class 2 is a flat rate of national insurance which is payable by sole traders and partners.  The contribution secures a year towards the number required to qualify for a basic state pension.  This tax will now be abolished in 2018.  A social security and state pension entitlement will accrue to self-employed people via the Class 4 National Insurance.  This is payable at the same time as income tax.

 

Capital gains tax cut

 

With effect from 6 April 2016, the basic rate of capital gains tax will be cut from 18% to 10% and the higher rate of capital gains tax will be cut from 28% to 20%.

 

The rate at which an individual pays capital gains tax depends on their total income.  Gains below the annual allowance are not taxable.  Taxable gains are added to an individual’s yearly income.  To the extent that total income and gains are above the higher rate tax threshold, gains are taxed at the higher rate.  Otherwise gains are taxed at the basic rate.

 

Gains made on residential property will continue to be charged at the existing rate of 18% basic and 28% higher rate tax.

 

Entrepreneur’s relief for investment in small companies

 

Entrepreneur’s relief will reduce capital gains tax for the subscription of shares in an unlisted company and held for the longer term.  The new rules will apply to any purchase in new shares made from tomorrow.  The requirement will be for the shares to be held for at least three years from 6 April 2016 or date of purchase, whichever date is the later.

 

In effect the rate of tax will be 10% and subject to a life time limit of £10 million.  The new rules extend relief currently available for shares purchased under the enterprise investment scheme.

 

Chancellor silent on entrepreneur’s relief restriction for contractor companies

 

The government had consulted on the abolition of entrepreneur’s relief on disposal of a business.  However, there were no announcements in the Budget about this relief being withdrawn.

 

There remains an opportunity for company owners to accumulate profits in the company and withdraw this on eventual disposal.  The accumulated funds in the business, usually represented by monies in the bank account, can be withdrawn as capital on eventual disposal.  The implication is that the funds will be taxed at just 10%, rather than the much higher rates for dividends or salary.

 

Nonetheless, holding funds in a company in order to save tax carries the risk that the rules about entrepreneur’s relief will be scrapped.

 

Lifetime ISA of £4,000 a year for the under 40s

 

From April 2017, the government will introduce a new ISA.  Savers who are under 40 on 5 April 2017, will be able to contribute up to £4,000 a year into an ISA.  For every £4 contributed by the taxpayer, the government will add £1 to the ISA account.  The government contributions will continue until the ISA holder reaches 50.

 

Some or all of the capital can be invested in an ISA for purchasing a property after just one year.  However the property must be the first home owned by the taxpayer and have a value of £450,000 or less.

 

Alternatively, savers can wait until 60 to use the capital as pension income.  Unlike pensions however there is no tax to pay on withdrawing the funds.  The tax relief on investment is equal to the current basic rate of tax.  To this extent the new ISAs will be more attractive to basic rate taxpayers.

 

If the ISA fund is not used to buy a home or for a pension on reaching 60, any withdrawals would be subject to a 5% charge and loss of the government bonus.  The measure is intended to assist young people saving towards a deposit on their first property.

From 6 April 2017, all savers will be able to contribute up to £20,000 a year into their ISA.

 

Personal allowance and tax threshold up next year

 

The Chancellor announced an increase in the personal allowance from 6 April 2017 to £11,500.  The higher rate tax threshold will also increase in 2017-18 to £45,000.

 

Author’s note

 

The Budget introduced some expensive tax breaks, with a particular focus on easing the burden for small business.  However, with a stated policy of national deficit reduction, it remains to be seen whether this trend of fiscal policy can be upheld.

Summer Budget impact on Contractor companies

Published: 05 Aug 2015

 

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A new dividend tax rate was announced on 8 July 2015 in the Chancellor’s Budget.  The implication is that no tax will be payable on the first £5,000 of dividends.  Thereafter, income tax will be charged on dividends at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional tax payers.

 

The implications for Contractors have been summarised in the article on 2016-17 Contractor companies.  The introduction of the new dividend tax will significantly reduce any tax savings currently enjoyed by operating via a company.  From 6 April 2016, contractors will probably pay more income tax on dividends (in addition to the corporation tax.)

 

The saving in national insurance (NI) will remain. However the NI saving of being a company may marginally outweigh the extra income tax (when compared with being a sole trader.)  As a broad measure, once profits exceed £65,000, if all profits are withdrawn as dividends there will no longer be an overall tax benefit to being a company.

 

Advantages of continuing via a company

 

  • Unlike employees, businesses can register for VAT. Particularly for flat rate scheme users, VAT registration is a considerable tax benefit, and unchanged by the Budget.
  • The paymaster will save in employer’s national insurance compared with hiring a contractor as an employee.  This is a considerable saving equal to 13.8% on earnings (above about £8,000 a year.)  There may be other non-tax benefits to the contract arrangement.
  • Paying a shareholder on a lower rate of tax (such as a spouse) will continue to have a tax benefit.

 

Outlook over the next five years

 

  • Corporation tax is reducing to 19% in 2017 and to 18% in 2020. This will reduce the overall tax payable by company owners compared with employees and sole traders.
  • Tax rules change frequently. This guidance applies to the 2016-17 tax year.

 

Tax planning

 

  • The new rules take effect on 6 April 2016. Therefore, the tax benefit of having a company up to this point will remain.
  • Consider taking as much dividend as possible before 6 April 2016.
  • Consider dissolving the company and withdrawing accumulated profits as capital gain on disposal of the business.

 

Dissolving the company

 

It is possible to extend an accounting period up to 18 months.  Accounting costs could be saved by extending the final period of account.

 

There is also the option of extracting some accumulated profit as capital on dissolving the company.  Up to £25,000 can be withdrawn without a requirement to involve an insolvency practitioner.