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Budget 2017: Dividend allowance slashed, self employed face higher taxes

  1. The Budget 2017

    ChrisGoodfellow Editor Staff Member

    Posts: 132 Likes: 37
    7 |

    The Chancellor repeatedly lauded his ambition to make Britain “the best place to start and grow a business” in the Spring Budget today, yet the self-employed and business directors face tax penalties.

    The dividend allowance has been cut by more than half and National Insurance bills are set to increase for the self-employed. However, there was some good news, with the creation of a £300m fund to help reduce the impact of business rate re-evaluations on those losing Small Business Rates Relief.

    We’ve set out the key changes and what it means for your business below. Let us know what you think in the comments.

    1) Small businesses set to benefit from three business rate reliefs

    The Chancellor recognised the impact of the business rates revaluation, which is due to be applied from April and will have a severe impact on businesses in areas with rapidly increasing property values.

    UK Business Forum’s member Shahid Hussain previously raised the sever impact of his rates increasing from £355 to more than £500 per month: “I do not find appropriate words to express my feelings of frustration after hearing this news. I wish you could see how much hard work I do just to earn my living from this business which has literally ruined me.”

    Chancellor Philip Hammond has implement three key policies to address the impact in a package which is expected to cost £435m over its course:

    No business losing Small Business Rates Relief will see their bill increase by more than £50 a month next year (expected to cost the government £25m in the next financial year)

    90% of local pubs will have a £1,000 discount on their business rates bill (expected to cost the government £25m in the next financial year)

    A £300m fund for local councils to offer discretionary relief for hard-hit cases.

    2) Reduction of the tax-free Dividend Allowance from £5,000 to £2,000

    At the moment, the Dividend Allowance means director and shareholders of companies can take £5,000 of dividends out of their company tax free, over and above their personal allowance.

    The Chancellor described this as an “extremely generous tax break for investors with substantial share portfolios” and cut the allowance from £5,000 to £2,000 from April 2018.

    About half the people affected by this measure are directors or shareholders of private companies, according to Hammond, “the rest are investors in shares with holdings worth, typically, over £50,000 outside ISAs”.

    The measure is expected to raise £325m in 2018-19, increasing to £645m in 2019-20, according to the government’s Budget policy costing documents.

    3) Self-employed face increase in National Insurance Contributions

    After a long introductory spiel, the Chancellor unveiled changes to the way self-employed people pay National Insurance Contributions (NIC) - the rate will increase by 1% to 10% in April 2018.

    Hammond argued that the difference in taxation between employed and self-employed people wasn’t fair given their use of services, and that the choice of status shouldn’t be driven by differences in tax treatment.

    “An employee earning £32,000 will incur between him and his employer £6,170 of NIC. A self-employed person earning the equivalent amount will pay just £2,300 – significantly less than half as much.

    “Historically, the differences in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits. But with the introduction of the new state pension, these differences have been very substantially reduced.” he said.

    From April 2018, when Class 2 NIC is abolished, the main rate of Class 4 NICs for the self-employed will increase by 1% to 10%, with a further 1% increase in April 2019. Self-employed people pay Class 4 NIC if their profits are £8,060 or more per year.

  2. Clinton

    Clinton UKBF Ace Full Member

    Posts: 2,411 Likes: 755
    An increase from 9% to 10% is an increase of 11.11%, not an increase of 1%. Chancellors of the Exchequer should be a little better at maths.
    Last edited: Mar 9, 2017
    Posted: Mar 9, 2017 By: Clinton Member since: Jan 17, 2010
    spreadingsmarketing and scstock like this.
  3. spreadingsmarketing

    spreadingsmarketing UKBF Newcomer Free Member

    Posts: 0 Likes: 0
    Thanks, Clinton, for that critical observation about the mathematically flawed nature of the 2017 budget. the chancellor's weak reason and argument of wanting to make it fairer between the employed and self-employed is also flawed mathematically: The self-employed individual contributes solely to the NIC, while the employed person makes a joint contribution together with their employer, so it;s expected that the employed together with employer should make two times more NICs.

    The 2017 budget is not being faithful to party manifesto and seems to have misled a lot of the gig working class, that would have voted or made life-changing decisions based on the current Class 4 NIC; the budget seems to undermine the contributions entrepreneurs and SMEs make to the economy. it's a concern if it is worth being self-employed or starting a small scale business anymore.
    Posted: Mar 10, 2017 By: spreadingsmarketing Member since: Apr 10, 2016
  4. Clinton

    Clinton UKBF Ace Full Member

    Posts: 2,411 Likes: 755
    I'd just like to point out that every chancellor makes this "mistake". Gordon Brown was particularly notorious in this respect. And they do it for cynical reasons - because they know how stupid the public are when it comes to maths. A 1% increase sounds so much better than a 11% increase. Bloody politicians.

    It's because of the rise in the gig economy that this measure was introduced - too many people taking jobs with the likes of Uber, MyHermes etc., but calling themselves self-employed. The big winners in that game are not the muppets doing the work, but the firms hiring them as employees (who are getting away without taking on the liabilitiesyou would with a normal employee).

    How this will play out in the longer term is that the "employees" will leave their "jobs" unless "wages" rise to compensate for this tax rise. I think there will be pain in the short term but that it's a good move overall. We want to encourage small businesses and entrepreneurs. Gig economy workers are neither.
    Last edited: Mar 10, 2017
    Posted: Mar 10, 2017 By: Clinton Member since: Jan 17, 2010
  5. websensejim

    websensejim UKBF Contributor Full Member

    Posts: 62 Likes: 15
    I was reading that one of the reasons given for cracking down on the dividend allowance was to stop some companies from using it multiple times by paying dividends to family members named as company directors (so you could have 2x, 3x the 5k allowance). Seems to me that this new crackdown will lead to a rush of companies now using this very tactic, to claw back some of the lost allowances.
    Posted: Mar 10, 2017 By: websensejim Member since: Jul 22, 2015
  6. Talay

    Talay UKBF Big Shot Free Member

    Posts: 3,655 Likes: 775
    Way back when, stoopid Broon introduced a tax free £10,000 allowance for companies.

    By my reckoning, the total number of companies registered just after that announcement almost matched the total number of companies registered in the preceding 150 years !

    It didn't last long !
    Posted: Mar 10, 2017 By: Talay Member since: Mar 12, 2012
  7. Ian J

    Ian J Factoring Specialist Full Member - Verified Business

    Posts: 4,005 Likes: 1,094
    I wonder how many people have started their own company recently just to save tax by taking out income as dividends. My guess would be very few
    Posted: Mar 11, 2017 By: Ian J Member since: Nov 6, 2004
  8. Talay

    Talay UKBF Big Shot Free Member

    Posts: 3,655 Likes: 775
    Certainly fewer than those who now send the wife, kids, parents, grandparents, dog, cat and budgerigar a £5000 dividend.

    I wonder if I have forgotten anyone ?
    Posted: Mar 11, 2017 By: Talay Member since: Mar 12, 2012