Budget Highlights for Personal Service Companies
Mar 20, 2017
If you are a contractor working through your own Personal Service Company you will find there are significant changes as a result of the recent Budget announcement. In this article, we look at the most important changes and how they will affect PSC contractors.
Rates and Allowances
- Income tax
Changes have been made to Personal Allowance and Income Tax rates for 2017 / 2018 including a Scottish Income Tax rate. The changes are outlined in the table below.
The personal allowance is to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21.
The higher rate tax threshold is to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21.
- Marriage allowance
This applies from 6th April and allows for the transfer of £1,150 of a personal allowance to a spouse or partner.
- Dividend Allowance
Changes to dividend allowances will affect all Personal Service Company contractors. The tax-free dividend allowance was introduced from April 2016 so that the first £5,000 of dividend income would be tax free.
In the Budget, it was announced that the tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018. Therefore, tax will be liable on an additional £3,000.
- Savings Allowances
You should also be aware of new trading and property allowances which may be relevant to you. From 6th April 2017 new trading and property allowances of £1,000 each will be introduced for individuals with low levels of income from these sources. This will simplify the system for both taxpayers and HMRC if small amounts of income can legally be ignored, rather than requiring a tax return for a trivial liability.
Therefore, in 2017/18, a basic rate taxpayer will have 3 separate tax-free allowances of £1,000 for savings income (bank interest), rental income and self-employed income, and £2,000 for dividends.
Self-employed National Insurance
While the Government announced changes to National Insurance contributions in the Budget, there was a subsequent U-turn on March 15th. As a result, the planned changes will not be brought into effect and current NI status and rates will remain.
Corporation Tax
Another important announcement in the Budget for PSCs related to Corporation Tax.
Corporation Tax rate to reduce to 19% from 1st April 2017, further reducing to 17% by 2020. This is in line with the previously announced business tax “roadmap” detailing the government tax strategy for the life of this parliament and beyond.
The government has said it remains committed to keeping the UK corporation tax rate the lowest in the G20 and has talked about the UK possibly having a rate as low as 15% in the future.
VAT changes
There have been changes to VAT thresholds for the forthcoming tax year and to the VAT Flat Rate Scheme.
Of course, we will ensure that the relevant VAT rates are applied for all clients, but the changes are outlined below for information.
- Revised thresholds
- Flat rate scheme
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that total output tax on sales in the period.
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour-only construction workers. A new 16.5% rate will apply from 1st April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel.
What to do next
If you would like further information on how the Budget affects you, please get in touch with a member of our Limited Company and Umbrella Plus contracting team on 01244 684700. You may also find it helpful to visit our Limited Company and Umbrella Plus information pages.