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Budget 2016 is largely positive for contractors and small business owners

Published on Thursday, March 17, 2016 Written by Dinah Makani

In his eighth Budget, George Osborne has set out measures to improve the health of the

UK economy. The 2016/17 Budget aims to balance the country’s finances as well as

reduce national debt and the budget deficit.

The long-term plan for a budget surplus stands and there appears to be support for

smaller businesses and the self-employed in terms of tax reductions and an increase to

the personal income tax allowance and the higher rate tax threshold.

Budget 2016 also targets large multinationals to ensure they pay their fair share of tax,

helping to reduce the pressure and tax burden on small businesses.

In this blog, you can find our short summary of each of the major changes announced to

see how they will affect your candidates’ take home pay.

Travel and Subsistence (T&S):

In September 2015, the government published a document discussion aimed at

modernising tax rules for T&S expense claims for contractors working through

employment intermediaries, i.e. umbrella company users. This has concluded that as of 1st

April 2016, T&S claims will be abolished for all workers claiming home to work expenses

when engaged in work via an employment intermediary.

For your candidates who may incur these expenses during contract work, working through

an umbrella company may no longer be the best option for them from 6th April 2016.

However, if they operate through their own limited company outside IR35, they may be

able to claim T&S expenses. Find out more here.

Personal Allowance Increase:

The government will increase the Personal Allowance for income tax from £11,000 in

2016/17 to £11,500 in 2017/18. Therefore, the typical basic rate taxpayer will pay £1,000

less income tax in 2017/18 than they did in 2010/11.

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Higher rate tax threshold increase:

Currently, anyone earning over £40,000 is taxed at 40% for all income above this amount.

In the 2016/17 tax year, the government will increase this threshold to £43,000 and in

2017/18, a further increase will raise the threshold to £45,000.

In addition to this, National Insurance Contributions (NIC) Upper Earnings Limit will also

increase to remain aligned with the higher rate threshold.

George Osborne has said that the increase of the higher rate tax threshold is a positive

change in that it ensures that individuals who should not be in the higher rate tax band no

longer are. From April 2016, your candidates who currently earn at least £43,000 in the

2015/16 higher rate tax band will now save up to £123 income tax in 2016/17.

Corporation Tax:

Corporation Tax will be reduced as of 1st April 2017 to 19%, and the government has

confirmed that by 2020 this will be as low as 17%. This will provide a long term saving on

the amount of Corporation Tax that businesses need to pay on company turnover. This

applies to small profit rates only.

This means that any of your candidates who operate through their own limited company

will pay less Corporation Tax, a move, George Osborne claims, to support the growth of

small businesses in the UK. If you would like more information about how your candidates

can start contracting through their own limited company, click here.

Capital Gains Tax:

Capital Gains Tax (CGT) will be reduced from 6th April 2016, the higher rate of CGT will be

reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%. To find

out more about Capital Gains Tax and how it applies to your candidates who operate

through their own limited company, contact us here.

VAT Registration threshold:

The government will increase the VAT registration threshold in line with inflation to

£83,000 from 1st April 2016.

Property Income:

In April 2017, the government will provide landlords with a £1,000 tax free property

allowance.

Abolishing Class 2 National Insurance Contributions:

The government will abolish Class 2 NICs for all self-employed workers. This means a

saving of £2.80 per week if profits are £5,965 or more per year for your self-employed

candidates. The government says this will result in a tax saving of more than £130 to

three million self-employed workers from 2018.

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ISA:

The overall annual ISA limit, meaning the tax free amount that can be added to an ISA

savings account each year, will increase on 6th April 2017 to £20,000. This is an increase

of £4,760 from the current ISA contribution limit of £15,240.

Additionally, a new Lifetime ISA account is being introduced for anyone under 40, which

includes a 25% government boost on savings put in. To help save for a house deposit or

retirement, individuals can save up to £4,000 each year in the Lifetime ISA. With the

government paying £1 for every £4 saved, it means that some savers will be able to save

up to £5,000 a year until they turn 50 years old.

Anyone who wants to use the savings towards buying a home (of a maximum value of

£450,000 in London) may do so after just a year, while those saving for retirement may

use the savings from the age of 60.

Dividend Taxation:

As confirmed in the Summer Budget, the government will proceed with the removal of the

dividend tax credit, and instead permit a £5,000 tax free dividend allowance from 1st April

2016. If you are worried that your candidates with limited companies will be affected by

this change, see our advice on dividend tax planning here or use the contact information

below to speak to one of our experts for more information to help your candidates.

Employment Allowance:

The employment allowance is changing. As of 6th April 2016, the Employment Allowance

will no longer be available to companies where the director is also the sole employee of

the company.

While the Employment Allowance is increasing from £2,000 to £3,000, due to the

additional criteria your candidates will need to meet, a large number of them who operate

their own limited company will no longer be able to make use of the employment

allowance. You can contact our team to find out more about this change.

Loans to participators:

If a company director has a director’s loan outstanding, they will pay an additional

Corporation Tax amount (s455) at 25% of the total outstanding loan amount (deducting

any repayments within 9 months of the year-end). Once a director repays this amount

back fully then the s455 Tax is recoverable from HMRC. It is not quick and can take some

years to receive back.

The Budget states that any director’s loans taken out after 6th April 2016, will see an

increase in the tax rate to 32.5% from 25%. Due to the s455 tax, it is advisable to

discourage your candidates from incurring director’s loans.

By using our accounting services and following our advice, your candidates will be able to

avoid the increased s455 tax and continue to maximise their take home pay.

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The restriction on the use of Personal Service Companies (PSCs) for public sector

workers:

In a clamp down on false self-employment by public servants, the government has stated

that individuals, who work through their own limited companies but undertake jobs that

would ordinarily mean they are employees of that business, will find they are going to be

restricted in the use of their limited company for such cases.

Under these circumstances, from April 2017, where the public sector engages an off-

payroll worker through their own limited company, that body (or the recruiting agency if

the public sector body engages through one) will become responsible for determining

whether the rules should apply, and for paying the right tax.

If your agency provides contract work to the public sector, this is important to note as

your agency’s responsibilities may change as a result.

Other good news:

Other good news coming out of the Budget includes a freeze on fuel duty for the 6th year

in a row. This represents savings of £75 per year for the average driver, and £250 savings

per year for the average small business owner with a vehicle.

George Osborne has also decided on a freeze on duties for beer, cider, whiskey and other

spirits for the 2016-2017 tax year.

The key phrase that will resonate with your candidates and all contractors is that George

Osborne wants to “let them keep more of the money they earn”.

Osborne is in support of the small business community in the UK in this Budget with

“lower taxes on business and enterprise” in order to help small businesses and the

economy to grow.

How we can help:

Our service provides contractors with an accountancy payroll service that stays a step

ahead of the changes. We have responded quickly to the dividend taxation changes and

devised a plan that will help your candidates who are limited company Directors to

maintain the maximum take home pay possible.

We work closely with recruitment agencies across the UK to help candidates decide on the

best accountancy service for their business needs. We help your candidates set up their

limited companies and manage their accounting and tax affairs, including providing advice

on dividend tax planning.

To find out how we can help to reduce the impact of the changes on your candidates that

come into effect this April, contact our team on 0808 1209113 or click here to find out

more about partnering with Churchill Knight & Associates Ltd.