Increase in NI   

The press can talk of nothing else but the self-employed being slammed by the NI increase announced in the Budget, but is it really all that bad? No-one likes tax increases and certainly it is true that as a sole trader you don’t get the SMP and holiday pay benefits that you would do being employed.

However, the vast majority of my sole trader clients are Mum’s operating micro businesses and operating as a sole trader because it is a simpler structure than being a limited company.  The increase in NI to 10% from April 18 and then to 11% from April 19 is never good news, but little coverage has been made of the fact that class 2 NI is being abolished from April 18 as well.

This therefore “saves” my sole traders approximately £150 per year.  £16,250 is being banded about as the magic figure where you start to lose out from the increase in NI. With profit of £16,250, you will be better off in 2018/19 by £67 in terms of NI, and pay almost the same as you do now in 2019/20.

Only if your profits are over £16,250 will you be worse off from 2019/2020 under these new rates.

£16,250 is the profit figure – not the sales figure, so this is after all relevant expenses have been deducted from your sales, to calculate your profit for the year.

Many of my clients operating “part time” small businesses will therefore not be adversely affected by this NI hike.

Making Tax Digital

The great news in the Budget was that Making Tax Digital is being deferred for one year for sole traders and landlords with turnover below the VAT threshold (£85k).  The start date for these businesses will now be 2019. Sole traders with turnover over the VAT threshold will have to comply in their first accounting period starting after 5 April 2018. (Top tip – move your accounting date forward from 5 April to 31 March and buy yourself another year!)

Childcare

Also confirmed was the gradual rolling out of tax-free childcare for children under 12 from April 17.  This will be the first time the self-employed will be able to get help with childcare.

Under the scheme the relief will be 20% of the costs of childcare up to a total of £10k per child per year.  The scheme will therefore be worth a maximum of £2k per child.  The government will pay in 20p for every 80p put in by the parents and will operate via an online account.

To qualify, neither parent must earn over £100k and both parents must meet a minimum income level based on the equivalent of working 16 hours per week at the National Living Wage.

So overall, a lot of my sole trader clients didn’t fare too badly under the Budget.  The deferral of MTD is a great relief and the ability to benefit from tax relief on childcare a benefit too.

For more information, please contact Rosie Forsyth.

The vast majority of small limited company owners will take money out of their company through a mixture of salary and dividends.  But the dividend rules changed from 6 April 2016 so as we approach the end of the tax year, here’s a reminder on the current rules and how you will now be taxed on your dividend income.

Under the new rules, the first £5,000 of dividends received in a tax year are tax free.

After that the following rates of tax are due:

• Dividends falling within basic rate tax – tax at 7.5% of the dividend received
• Dividends falling within higher rate tax – tax at 32.5% of the dividend received
• Dividends falling within the additional rate of tax – tax at 38.1% of the dividend received

So it is no longer the case that you can extract dividends from the company up to your basic rate threshold “free of personal tax” and you need to think about the personal tax that will be due, when considering your company dividend policy.

The tax on these dividends will be declared on your 16/17 tax return – due to be filed by 31 Jan 2018 and the tax is payable then too.  But you do need to remember that if you have a personal tax bill due at that time of over £1,000, then you will also have to make a payment on account of your 17/18 tax, equal to 50% of your current year’s bill.

An individual who has traditionally taken salary of £11,000 and dividends up to their basic rate limit  (approx £32,000) will be £2,025 worse off under the new rules for the current tax year, so you need to make sure this money is put aside in preparation for your bill at 31 January.

Getting your tax return done early in the tax year will mean the tax due can be calculated and you will know precisely what your bill at 31 January is going to be!

For more information or help estimating the personal tax due on your dividend income, please contact Rosie Forsyth.