Today’s Budget announcement did not bring too many surprises, or big changes, relevant to contractors and freelancers. Much of the speculation around pensions did not come to light this time around, and the bill is still underway regarding Elective Resolutions, and winding up limited companies tax-effectively.
The biggest announcement was probably around the economic growth predictions taking a tumble, however there were several other relevant updates that are essential for contractors and freelancers to understand for personal and business tax planning as well as retirement planning.
Much focus from the Budget announcement, and in the 24 hours following, has been regarding the comparison of previous economic growth predictions made by George Osborne in November 2014, and the revised figures now presented by the Office for Budget Responsibility (OBR), not even six months later.
Despite the UK economy growing steadily for 12 consecutive quarters, the deficit forecast for the next few years has been downgraded by OBR, showing that the UK has even more work to do to fill the gap.
His message is, broadly, that whilst the next two years will be tough, with added pressure from a slow global economy, his surplus could be achieved sooner than originally predicted.
Budget points affecting contractors and freelancers
The main areas likely to affect contractors and freelancers are as follows:
Further reduction in corporation tax rate on the horizon
The UK currently has the lowest rate of corporation tax (CT) in the G20, however in yesterday’s Budget it was announced by 2020 the rate would be reduced to 17%.
This will be favourable to most contractors, many of whom choose to trade as a limited company for tax reasons.
More income at basic rate tax
The threshold for which higer rate tax is applied is soon to be £43,000, from April 2016, with a further increase in 2017 to £45,000, meaning more income will be taxable at the basic rate, currently 20%.
This applies to contractors who use a limited company and draw dividends, as it will effectively be possible to draw more income before 40% tax is applied. Self-employed contractors will also benefit through their self-assessment.
Increase in the personal tax allowance
A further increase in the personal tax allowance will be applied in 2017, to £11,500, resulting in more income being completely tax-free.
Plan to scrap Class 2 NI
For self-employed contractors and freelancers, earning over c£6,000 per year, Class 2 NI is currently payable at £2.80 per week. It enables contribution towards the State Pension entitlement.
However, an overhaul is on the cards for 2018 to scrap this NI altogether and instead make changes to the Class 4 NI so that pension contribution is possible through here instead.
Change to Capital Gains Tax (CGT) rate
From April 2016 the CGT rate will be cut for higher rate tax payers, from 28% to 20%. Basic rate tax will be cut from 18% to 10%, also.
CGT applies to gains made from the sale of assets, typically property or shares.
Residential property, however, will be subject to an 8% surcharge, resulting in effectively no change from the current rates. This applies to second homes and buy-to-let investments properties only, as your principal private residence is protected under PPR relief, so CGT does not apply.
An increased ISA allowance
ISA’s are a useful means of tax efficient savings and many contractors choose to maximise their ISA allowance each year. The current limit is £15,240 and will increase to £20,000 from April 2017.
This is part of the government’s incentive to create a “saving mentality” and help by allowing more investment tax-free each year.
A new Lifetime ISA
The new Lifetime ISA will be introduced as a further incentive to encourage savings. A maximum of £4,000 per year can be saved per individual that can be accessed after age 60, as part of a retirement plan, or, withdrawn before if the funds are going towards a first home.
The government will top up the ISA with 25% contribution.
Need help with tax planning
ISA’s are a tax efficient way for contractors and freelancers to save and can be integrated into a structured retirement plan, whilst saving you tax in the meantime.
Send an email for some initial advice – firstname.lastname@example.org
For property investors…
For contractors who also have property investments, the news of the change in Stamp Duty Land Tax (SDLT) for commercial properties, could be of interest.
The residential SDLT system was overhauled in 2014, and subsequently buyers are saving thousands on their home purchases. Now the commercial SDLT system has been reformed in a similar way, so that only the proportion of the value of the property that falls in each tax band is applied. This is expected to save tax for anyone investing in property under the value of £1.05 million.
The new rates and bands are:
- £0 – £150k – 0% SDLT
- £150,001 – £250,000 – 2% SDLT
- 250,001+ – 5% SDLT