With the possible exception of measures for savers, it’s fair to say the budget was a relatively uneventful one and was broadly fiscally neutral, with little in the way of pre-election giveaways. This is unsurprising given the Chancellor’s consistent rhetoric, throughout the parliament, of fiscal responsibility and the long term economic plan, as well as the proximity to polling day.
It was a political budget however, with the Chancellor understandably setting out clearly the economic successes over the last 5 years, in terms of return to growth and uplifted growth projections, a reducing deficit, record employment and a projected return to surplus. There was some relaxing of the pressure on public spending during the next parliament but by no means any suggestion that there wouldn’t still be significant cuts to come, with increases in spending in some years and decreases in others, over the course of the next parliament.
In truth, there wasn’t much in this budget that seemed designed to directly have a meaningful effect on small businesses specifically, in the short term. Of course, small business owners and freelance contractors will benefit from the increases in personal allowances and measures to reduce tax on savings along with the rest of the population but the budget was light on specific small business initiatives or changes generally, in our opinion.
The long-awaited and pre-briefed review of business rates was mentioned, though no details were given and any changes are set to be fiscally neutral.
Also known before the budget but worthy of mention is the fact that all businesses will face a single 20% rate of corporation tax from April this year.
The Alternative Investment Allowance, which allows SMEs to claim 100% tax relief on asset purchases and which is due to revert from it’s current limit of £500,000 to £25,000 at the end of the year, will be reviewed and maintained at “a much more generous rate” than the £25,000 (more details in the Autumn Statement).
Class 2 national insurance contributions for self-employed workers will become payable annually instead of weekly and will be abolished altogether during the next parliament. From April 2015 employer’s national insurance contributions, currently 13.8% paid by the employer, will not apply to under 21-year old employees and will not apply for apprentices under 25 from April 2016.
There were measures designed to help specific industries and regions however, including oil and gas, creative industries (film and TV), science and technology, the North of England (the so-called ‘Northern Powerhouse’), many regional initiatives and enterprise hubs in Leeds, Manchester and Sheffield, as well as investment in broadband connectivity.
Freelance Professionals and Self-Employed Contractors
The key areas that will have a potential impact on this crucial and growing sector of the economy were:
- The increases in the personal allowance to £10,800 from April 2016 and £11,000 a year later, with the affect flowing up to the high-rate tax band and increasing the amount earned before earners reach the 40% tax bracket, where dividend income effectively becomes taxed – this threshold will increase to £43,300 by 2017
- The launch of new ISA savings rules allowing savers to access the money in an ISA without losing the annual tax benefit associated with it. This makes life easier for contractors that want to invest in an ISA and take advantages of the tax-free status but worry about tying up funds in case they face a gap in their earnings
- Umbrella companies: the Chancellor reiterated his stance that the government will restrict employees of umbrella companies (and indeed any ‘inside IR35′ PSC contractors), from being able to claim travel and subsistence expenses against their income, potentially reducing the take home pay of umbrella contractors once the rules are implemented in April 2016
- A raft of measures to support the under-pressure and contractor-intensive oil and gas sector, including a reduction in the supplementary charge from 32% (at the Autumn Statement) to 20%, a reduction in the petroleum revenue tax from 50% to 35%, the introduction of a single tax allowance to stimulate investment throughout the industry and investment in exploration
- Investment in science and technology with Entrepreneur Hubs in Leeds, Manchester and Sheffield and £40m of investment in projects relating to the ‘Internet of Things’
- Further support for other heavily self-employed industries such as creative, film and TV and ongoing investment in national infrastructure and construction
- The Chancellor welcomed the Office of Tax Simplification’s review of Employment Status and said the government would consider the proposals more closely in due course. The outcome of this review could potentially have major implications for self-employed and freelance professionals.
Other more general areas of note were:
- Reform of tax on savings, such that no tax will be payable on the first £1,000 of savings income a year for basic rate (20%) tax payers and £500 for higher rate (40%) tax payers and an end to taxing savings at source (the allowance is not available for additional rate tax payers earning £150,000 a year or more)
- A Help to Buy ISA for first time buyers only, where a maximum of £200 per month can be saved and the government will contribute a further 25%, up to maximum of £3,000 on savings of £12,000. The ISA can be used on house purchases of up to £250,000 (£450,000 in London)
- Further measures to increase flexibility for pension holders, a reduction in the lifetime tax-free pension pot allowance from £1.25m to £1.0m but no change in the annual contribution amount
- More measures to counter tax avoidance, including the diverted profits tax (to stop multinational companies channelling profits to low-tax jurisdictions), more accelerated payment notices to take cash from those that are deemed to have avoided tax in advance of proving the case, closing of loopholes on contrived corporate avoidance schemes, penalties for tax serial avoidance promoters and protection from abuse of EIS/SEIS and VCT investment schemes
- An increase in the bank levy and a restriction on compensation payments being offset against corporations tax bills by banks (for example PPI and bank rate fixing compensation payments)
And finally… the abolition on the Self-Assessment tax return by 2020!
This headline may be overstating the case slightly but it sounds like it will certainly simplify the affairs of those who need to submit a tax return containing data already known to HMRC, such as PAYE salary/wage income, pensions, state benefits and maybe linking to financial institutions to cover savings income. The idea is that this would be pre-populated into an online account, for the tax-payer to check and approve and pay any tax due against, during the year.
However, the tax payer will still have to review the account for accuracy and, crucially, will have to declare any income not already entered.
So, it looks like small businesses, limited companies, freelance contractors working through a personal service company and landlords will still need to compile sets of accounts and calculate and enter things like dividends, profits and rental income, which are not already known to HMRC, into the the online account, just like they currently have to with an online tax return.