Budget 2016

On 16th March 2016 the government delivered the 2016 Budget and we highlight in this article some key points for freelancers, contractors and small businesses.

We have focussed on the main issues that affect our core client base, if you’d like to read the budget in full (some light bed-time reading) you can get it from HMRC here.

Some of these announcements come into effect now or shortly but many of them are for the year after or beyond.

Budget 2016

Income tax

The personal allowance for 16/17 (6th April 2016 to 5th April 2017) is set at £11,000, this will now increase to £11,500 for 17/18, whilst the higher tax band, which is set at £43,000 for 16/17 will increase to £45,000 for 17/18.

Class 2 National Insurance (Self-Employed)

It’s a while off, but from 2018 Class 2 NI for the self-employed will be no more so if you’re self-employed you should only have one category of national insurance to worry about (currently known as Class 4). This is a much needed simplification of the national insurance system for the self-employed.

Directors Loans

The tax paid on directors loan balances that remain unpaid within 9 months of the end of an accounting year, known as s455 tax, will increase from 25% to 32.5% for any loans that are made from 6th April 2016.

Corporation tax

Corporation tax will drop from the current rate of 20% to 19% from April 2017 (this was already known). However corporation tax was expected to drop again to 18% by 2020 but this has now been reduced further down to 17%. This, along with the increased personal allowance and higher tax band should help mitigate the extra tax payable due to the changes to dividend taxation.

Lifetime ISA

This is an interesting one, it doesn’t come in for a year, but from April 2017 there will be a new savings structure called the ‘Lifetime ISA’. If you’re under 40 you’ll be able to open a Lifetime ISA and save up to £4,000 per tax year and you will get a 25% bonus from the government. So for every £4 you pay into the Lifetime ISA the government will put £1 in. You will be able to pay into the ISA and get the government bonus 25% until you’re 50. There are various rules about when you can withdraw the cash and potential tax consequences. HMRC have a fact sheet about the Lifetime ISA here.

The general overall ISA limit (total for all your ISA’s) will also be increasing from April 2017 –  from £15,240 to £20,000.

Capital Gains Tax

This was somewhat un-expected – from 6th April 2016 capital gains tax rates are reducing. The higher rate will reduce from 28% to 20% and the basic rate will reduce from 18% to 10%. There will be various rules and details about this to come out, one of them being that these new lower rates do not apply to residential property (i.e. buy-to-lets) which will continue to be taxed at current capital gains tax rates.

Public Sector Personal Service Companies and IR35

If you work through your own personal service company and contract with public sector clients this could have quite an effect on you, although the details are still to come. From April 2017 if you work through your own company in the public sector you will not be able to personally decide if IR35 (the intermediaries legislation) applies. It will be the agency or the public sector employer that has to decide if IR35 applies or not, and if they deem that you are caught by IR35 it will be them that have to deduct the applicable tax and national insurance.

This appears to be a first step by HMRC in their attempt to reform IR35.

HMRC have also announced that there will be a new online tool you can use to test your IR35 status, although previous attempts at this have not been very successful!

VAT registration threshold

The VAT registration threshold which is currently £82,000 will increase to £83,000 from 1 April 2016.

Budget 2016 Summary

We believe that for the majority of freelancers, contractors and small businesses the 2016 budget was largely positive.

The governments focus on increasing the personal allowance and higher tax band and also on decreasing corporation tax rates is welcome and the simplification of national insurance for the self-employed is long overdue.

We hope you have found this article about the 2016 budget useful, if you operate through a limited company you can find our article about optimum salary and dividend levels for 16/17 here.