Been on the edge of your seat for the past year, waiting to hear about how the UK’s next Budget will affect your life as a self-employed person and the fate of the country at large? You’re not alone!
Yesterday, after months of delay, it finally landed.
And boy, what a Budget. Our shiny new chancellor Rishi Sunak kicked off with emergency measures to stabilise the country in the wake of the global COVID-19 pandemic, and we suspect the curveballs that followed (such as the surprise corporation tax freeze) are also related.
What changes do you need to know about? Will your business finances look fatter or leaner at the end of this year than last year? And (if you were listening in) has the chancellor trademarked the phrase “this gets it done”?
We can’t answer that last one, but we’ve summarised our top takeaways for self-employed people below.
A range of measures are being introduced to support small businesses, from loans to grants. Annoyingly though, the government hasn’t been very clear who they consider to be a “small business”.
This means that whether you’re a sole trader, a PSC limited company, or a limited company with a couple of employees on payroll, it’s tough to say exactly how you’re impacted and what you could be eligible for.
Rather than guess and miss out or get it wrong, we heartily recommend you get in touch with HMRC and ask them to clear it up for you.
You’re also welcome over at our forum, Coconut Bite, to ask the community and share your views.
In previous Budgets, chancellors have increased the amount self-employed sole traders and regular employees can earn before you pay income tax, known as the personal allowance. That’s not the case this time.
The amounts will remain the same for the 2020/21 tax year. This means there’s still a threshold of £12,500 before you start paying 20% income tax, and a threshold of £50,000 before you start paying 40% income tax.
Well, this was unexpected news for limited companies.
The government has decided to keep corporation tax at 19% rate instead of decreasing it to 17% for the 20/21 tax year as they’ve suggested in the past.
One promise from the government was a tax break regarding national insurance - and they’ve delivered on this.
The current threshold sees employees and self-employed people paying contributions once they earn an annual salary of £8,632 a year or £166 per week. From 6 April, you’ll start paying when you earn £9,500.
Class 2 NICs (National Insurance Contributions) are what self-employed people pay HMRC to get access to benefits such as the Basic State Pension, Bereavement Benefits and the Maternity Allowance.
The amount is increasing from £3 a week to £3.05 a week for the 2020/21 tax year.
Do you have employees on your books? From 6 April 2020, you could get up to £4,000 a year off your national insurance bill. That’s an increase on the previous allowance of £3,000. In other words, this could spell an extra £1,000 for you.
The allowance means employers only start to pay Class 1 (secondary) National Insurance Contributions when they run their payroll after they’ve used up the £4,000 or until the tax year ends, whichever comes first. Beyond that they’ll have to pay the standard rate of 13.8%. More info here
From 11 March 2020, the lifetime limit on gains eligible for Entrepreneurs’ Relief has been reduced from £10 million to £1 million. Entrepreneurs’ Relief means you’ll pay tax at only 10% on all gains on qualifying assets, such as selling a business. More info here
If you’ve made money from capital gains this year - that’s where you sell an asset such as stocks, shares and bonds for more than you paid for it - the amount you can earn tax-free is going up from £12,000 to £12,300 from 6 April 2020.
If you work from home and claim a flat rate for household expenses (such as electricity and water (instead of calculating a percentage of your overall bills), the amount you can offset against the tax you pay is going up from £4 per week to £6 per week from 6 April 2020.
Technically this is nothing to do with the Budget, but it may well have a bearing on your business finances and it was announced around the same time, so we’ll include it here anyway.
The Bank of England has cut interest rates to 0.25% from 0.75%, which reduces borrowing costs to the lowest level in history. This means that if you need to take out a business loan or any other type of credit, you’ll probably pay less for it than you would have done before the Budget.
On the flipside, it also means that the interest offered on savings accounts will likely drop too.
For self-employed individuals:
There are two types of benefit to mention here.
Firstly, if you’re not eligible for sick pay, you could be able to claim the Employment and Support Allowance (ESA) from day one of "illness" rather than day eight. This is paid to people who are too sick to work, as long as they meet certain conditions. (Hence “illness” in quotation marks. It’s complicated.)
Secondly, the government is temporarily removing the minimum income level for Universal Credit to help compensate self-employed people from losses in income due to COVID-19. This benefit seeks to support low earners, but the change means people could still be eligible when they’re off work due to sickness or if they’re self-isolating. The rules around Universal Credit are already less complicated than for Employment and Support Allowance, and it’ll be even easier to access while the pandemic lasts: it’s now possible to apply by phone or online as well as in a job centre.
Furthermore, a new £500 million hardship fund is also being made available for councils to use to support economically vulnerable people in their area.
For limited companies:
The government will support businesses that struggle with increased costs and cash flow trouble due to COVID-19.
This includes a Coronavirus Business Interruption Loan Scheme that enables banks to offer a further £1 billion in loans to SMEs.
There will also be a dedicated helpline for limited companies who need to defer their tax payments till a later date.
For companies that lease a commercial property:
This applies to small businesses that are currently eligible for Small Business Rate Relief or Rural Rate Relief. (Business Rates are the tax that’s usually charged on a commercial lease, and some small businesses don’t have to pay them.)
The government will provide £2.2 billion of extra funding to local authorities in England to help these small businesses meet their ongoing business costs. Around 700,000 companies will benefit from £3,000 each.
For a commercial property with a "rateable value” (annual rental value as estimated by the council) of £12,000, this shakes out as 3 months of rent. Most properties that are eligible for Small Business Rate Relief will have a lower rateable value, which means this funding will cover an even bigger chunk of their yearly rent.
Previously you could contribute up to £40,000 a year to a personal pension if your income was less than £110,000 a year, or up to £10,000 a year if you earned more than that.
Under the new Budget, you can now invest up to £40,000 a year if your income is less than £200,000, but if it exceeds that threshold, you can only invest up to £4,000.
(The cap on your contributions applies to your total pension pot if you have more than one, not per person.)
Wow. This beast didn’t even come up when the chancellor was delivering the Budget.
But the government’s 100-page follow-up document confirmed that it’s full steam ahead with the IR35 rules and regulations as communicated in the past.
In a nutshell, the rules around off-payroll working are being reformed, with the goal to crack down on tax avoidance among long-term self-employed contractors who are considered “disguised employees”. The government recently concluded its review of the reform and is now implementing changes to see it through smoothly when the legislation comes into effect from 6 April 2020.
We’ll follow up with further guidance about this in due course.
The government’s Finance Bill will be released on 19th March 2020, so we will keep an eye on this and bring you an update of any further information once we have it.
In the meantime, if you’re affected by IR35 (or are worried that you might be), please do check with an accountant and/or HMRC.
How has the 2020 Budget impacted you as a self-employed person?
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As part of HMRC’s Making Tax Digital, sole traders will soon be required to complete 4 tax submissions per year instead of 1.
Take a look at the latest sole trader tax rates for the 2021/22 as well as our advice on how to prepare for the new tax year.