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How will the Budget affect small businesses?

By Rebecca Milligan

Anyone who runs their own business will be affected by changes in the Budget. We break down what some of the announcements mean for small businesses.
Philip Hammond sitting at desk with red budget box

Philip Hammond’s spring Budget initially included major  changes to National Insurance contributions (NICs) for the self-employed, but a week later this measure has been reversed. The NICs increase appeared to break a Conservative manifesto pledge not to raise National Insurance contributions during the lifetime of the parliament, so Mr Hammond has scrapped the plans - for now.

So there will be no increase in Class 4 NICs, but there are other changes that will affect small businesses over the coming years, including changes to the level of dividend payments that are tax-free, the income threshold, and significant changes to technical training qualifications. Finance isn’t everyone’s favourite subject, but it’s worth reflecting on what they will mean to you and your business.

Changes for the self-employed

National Insurance contributions

There will be no increase in Class 4 National Insurance Contributions, but Class 2 NICs are still to go. This means from April 2018, all self-employed workers will have to pay Class 4 NICs on their profits, provided the profits are over the minimum threshold.

Class 4 NICs are currently:

  • paid at 9% on your profits between £8,060 and £43,000
  • at 2% above £43,000

From April 2017, they will be:

  • paid at 9% on profits between £8,164 and £45,000
  • at 2% above £45,000.

The levels of profit on which you pay different rates of National Insurance tend to increase annually and haven’t been confirmed yet for 2018 and 2019.

Low earners may see a reduction in their NICs charges, as class 4 contributions are charged on profits. But there’s no escape for company directors, who might pay themselves a lower salary and take the rest in dividends.

Reduction in the tax-free dividend allowance

In a further measure that affects business owners, investors and company directors, the chancellor announced a reduction in tax-free dividend allowance, which is:

  • currently £5,000
  • being reduced to £2,000 from April 2018.

The reasoning behind the reduction is to make it harder to avoid taxes by supplementing your salary with dividends from a company. 

The tax rate on dividends will be the same, but higher-rate tax payers will pay an extra £975 a year as a result.

Quarterly reporting delay for smallest businesses

The government had already announced the a move to quarterly digital reporting for the self-employed – requiring self-employed businesses to send in tax returns online four times a year. Mr Hammond threw a lifeline to businesses trading below the VAT threshold – these businesses will get an extra year to put processes in place to prepare.

Changes for employees

So much for the self-employed and those who own their own VAT registered businesses, but what about if you have employees? How will the changes affect them – and your business?

Income tax rates

Personal taxes are largely unchanged. Income tax rates remain the same, but the personal tax rate threshold will rise:

  • to £11,500 in April 2017 – so everyone can earn an extra £500 before starting to be taxed at the basic rate (20%)
  • to £12,500 during the parliament, although we do not yet know when that will happen.

The higher-rate tax threshold will also rise:

  • to £45,000 in April 2017 – so you will pay tax at 40% on earnings above that figure. 
  • For people paying tax in Scotland, the higher-rate threshold will remain at £43,000.

The additional-rate threshold (above which point you are taxed on your income at 45%) remains at £150,000.

Pensions

There were no major changes in pensions during this budget – you can read more analysis of pensions in the budget here, or read on for more about changes to business taxes.

Business taxes

Business rates

If you have retail premises, then you are likely facing a change in your business rates. In some areas of the country you will see a reduction, but other areas – particularly in the south east of England – businesses are facing sharp increases.

The chancellor said the government will be looking at ways of reforming the revaluation process, to avoid dramatic increases in the future. But for now, any re-evaluations will stand. However, there are a couple of measures that could help businesses struggling with large increases.

  • A £300m fund for local authorities to help businesses facing particularly large increases, on a discretionary basis.
  • Support for businesses that were benefiting from small business-rate relief. These businesses will have their bill capped, so it can’t be more than £50 a month higher than it is now. Any subsequent increases will also be capped at a further £50 a month, or a transitional rate – whichever is lower.

Corporation Tax to fall to 17% by 2020

If you trade as a limited company, then you are liable for corporation tax – this does not apply to sole traders or partnerships. In a business-friendly measure, the chancellor chose to cut the rate of corporation tax, which will drop 3% over the next couple of years.

Currently, limited companies have to pay corporation tax on their profits at 20%, but this is set to fall to 19% in April, then reduce further to 17% by 2020.

For more guidance about business taxes, read tax made simple for small businesses. Read on for more budget announcements about changes to technical training.

Investment in skills training

The government announced a series of measures designed to raise the status and standards of technical skills training. These include a commitment to raising the status of skills-based training by funding further apprenticeships and new qualifications, and to make it simpler for employers and consumers to see to what level someone is qualified.

The main changes are:

  • the continuation of an apprenticeship levy on large businesses to fund a further 3m apprenticeships by 2020
  • the introduction of T-levels
  • an increase in the number of training hours for technical students, including work placements
  • £500m a year to support technical education for 16 to 19-year-olds
  • Extending the offer of maintenance loans to students studying at technical colleges

T-levels will probably make the biggest change to Which? Trusted traders, as you’ll start to see future employees coming out of college with these new qualifications some time after 2019. Students who decide to study a T-level will spend 50% longer learning than they currently do – around 900 extra teaching hours a year. The idea is that they will be better qualified and ‘work fit’ when they enter the jobs market.

As T-levels will replace thousands of existing qualifications, it should make them easier for future employers and consumers to understand.

Increased powers to consumer bodies

In other news, the government also announced the prospect of increased powers to consumer bodies and moves to simplify terms and conditions. Something Which? Trusted Traders thoroughly approves of. There was no timeline given for this, so we’ll have to see what it means when it’s introduced – but we will be sure to keep you informed if there are any changes needed to your business’ terms and conditions.

More on this…

Tags: Budget Finances Tax Training

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