The Budget Spreadsheet

As with most Budgets, there were reminders of announcements past, announcements about impending changes and predictions of the future. As far as the recruitment industry is concerned it’s worth summarising these by implementation date.

Effective April 2017

• Corporation tax decreases to 19%.
• Increase in personal allowance to £11,500 and the higher rate income tax threshold to £45,000, except for Scottish residents.
• Increase in National Living Wage to £7.50 an hour.
• Apprenticeship levy commences, affecting businesses with payrolls exceeding £3 million.
• VAT registration threshold increased to £85,000.
• Implementation of the VAT Flat Rate Scheme Limited Cost Trader rules imposing a flat rate of 16.5%.
• Implementation of off-payroll working in the public sector rules. These rules impact both intermediaries and contractors working through their own personal service companies and extend the reach of IR35 by taking the decision making and tax deduction responsibility away from the contractors. This is likely to result in more tax and NI being paid.
• New business rates regime. Smaller businesses that previously benefitted from small business rates relief will have rates increases capped to no more than £50 per month. There’s also some funding aimed at those businesses which would suffer most from the new business rates regime, which is to be implemented at local level.

Effective April 2018

• Abolition of Class 2 NI, paid by the self-employed at a flat rate.
• Increase in Class 4 NI to 10%, paid by the self-employed on profits.
• The two measures above are beneficial for those earning below £16,250.
• Decrease in the dividend tax-free band to £2,000 (currently £5,000).
• Implementation of Making Tax Digital for the self-employed and landlords, although those with income below the VAT registration threshold will have commencement postponed for a year.

Effective April 2019 and beyond

• Increase in Class 4 NI to 11%.
• Increase in personal allowances and higher rate income tax threshold. Details not announced, but expect £12,000 and £47,000 respectively.
• National living wage increase – amount not yet announced.
• From April 2020, corporation tax rate decreases to 17%.

More generally, the squeeze on tax avoidance continues and the subtext of some of the Budget speech was that self-employment and operation through a personal service company were both forms of loophole-exploiting avoidance that need to be taxed out of existence.

Historically, employees and employers paid more NI than the self-employed as better pensions and benefits were available to employees. There’s been some levelling up of the pensions and benefits between employees and the self-employed, but it’s not a level playing field yet. Whilst the announced increases get amounts of NI payable by employees and the self-employed closer, the NI payable by employers outweighs both these sources and represents a significant cost difference between employment and self-employment.

It seems that anyone who operates through a personal service company has really annoyed the Treasury. The changes arising from off-payroll working in the public sector rules, the limited cost trader flat rate VAT rules and the decrease in the dividend tax-free band will make operating in this way less financially attractive in future.

Certainly the tax incentives for off-payroll working are being eroded, although, without a wholesale rewrite of the tax code, tax differences between employees and the self-employed will persist.

The changes above bring collateral damage to business owners from 2018 and they are going to be impacted by either the Class 4 NI changes if they are sole traders or in a partnership or an LLP and company shareholders are going to be hit by the decrease in the tax-free dividend band.

The changes that are upcoming in April 2017 need to be thought about urgently in the context of each individual’s and business’s circumstances. The points noted above are not exhaustive and the tax and regulatory climate in the UK changes frequently, so up to date advice is essential for those who want to make the best of their tax position.