No real ‘new’ changes have emerged, with key changes affecting freelancers having already been announced previously- such as the increases in national insurance for employers and employees. Overall, it’s more of an election budget than one of strategic economic importance. It does some good to small businesses and little harm to contractors.
So what’s the good news?
Stamp duty
The Budget’s headline announcement was the surprise stamp duty reduction for first-time buyers. This applies if the property costs less than £250,000 - But there are a few catches:
- The relief is only for first-time buyers - it does not apply if the purchaser has ever owned a property before, anywhere in the world;
- It is not automatic, but must be claimed, and those claiming the relief will have to certify that they have never previously owned a property; and
- It is a two year suspension, not an annulment: at the end of the two years, the exemption will disappear.
The relief will be funded by a new 5% rate on properties worth £1m or more. And this 5% is not a transitory rate; it will remain long after the “first-time buyer” relief has disappeared.
This change gives buyers an increased incentive to negotiate hard to keep transactions below these levels as significant savings can be made. With the majority of property transactions outside of London falling below or around the £250,000 boundary means that if you are purchasing around this price then it would be to your advantage to negotiate below the threshold for a £7,500 saving in tax.
If you want to calculate how much you could borrow based on your daily rate click here for a no-obligation quote from Contractor Mortgage Specialist - Freelancer Financials.
Annual ISA limit
From April your Individual Savings Allowance will increase to £10,200 for the 2010 to 2011 tax year. This limit is also set to increase annually in line with inflation. For further information or details relating to ISA investments please click here
Inheritance tax threshold
This has been frozen at £325,000 for four years.
Corporation tax and NICs thresholds
Probably the most important announcements for contractors are that:
- The small company’s corporation tax rate remains unchanged at 21%, and
- From 2011 there will be an increase in the NIC threshold, raising it £570 above the then personal allowance. This will allow a slightly higher NIC-free salary to be paid by limited company owners.
Increase in the investment allowance
This allowance allows businesses to deduct the full value of its annual capital expenditure such as computers and furniture. The Chancellor has increased the value of the allowance to £100,000 - an increase of £50,000 compared to 2009/10.
This is good news, but of course most small businesses don’t spend even close to £50,000 a year, let alone £100,000, on capital assets. And don’t forget the other downsides: the allowance can’t be used for cars, and if you sell the asset later, you’re taxable on the proceeds.
Doubling of entrepreneur’s relief and no change to CGT
If you sell your business, you can claim entrepreneur’s relief. This previously allowed a reduced rate of CGT - at 10% - on up to £1m of gains, now increased to £2m. Again, not many small businesses are worth this much, so relatively few contractors with limited companies are likely to benefit from the extra relief. The main rate of CGT remains at the relatively benign level of 18%, despite suggestions that it was ripe for reform. Many commentators consider that the rate is unlikely to remain at this level for long, and crystallising gains rather than delaying them may thus be a good strategy.
VAT
The VAT rate is also unchanged, at 17.5%. Again, there has been widespread comment that increasing VAT to perhaps 20% would be a good way of reducing the national deficit, but there was no sign of this in the Budget - so no change, at least not until after the election.
There have, however, been small adjustments to the registration thresholds. From 1 April 2010 the taxable turnover threshold increases from its current level of £68,000 to £70,000; the threshold which determines whether a person may apply for deregistration increases from
£66,000 to £68,000.
Now for the bad news
Increase in National Insurance Contributions
Employer, employee and self-employed rates of National Insurance each increase by 1% from April 2011. The main employee rate will become 12%, the employer rate 13.8%, the additional rate (payable on earnings above £43,875) 2% and the self-employed Class 4 rate 9%.
Currently, most contractors are paid some salary by your limited companies. As a result, you will suffer both the employee rate and the employer rate on salaries above the NICs threshold, so the costs of paying salary compared to dividends will further increase. Those contractors within IR35 will be even more harshly affected.
New 50% rate and withdrawal of allowances
From 6 April 2010, a new higher rate applies to incomes of £150,000 or more, and personal allowances are withdrawn for those with incomes over £100,000. Limited company owners, who pay themselves in dividends, have more control over their earnings. It may thus be possible to mitigate the effects of these rates, at least in the short term, but avoidance may be controversial and it is advisable to take professional advice.
Pension contributions
From April 2011, tax relief on pension contributions will be restricted to the basic rate for those with income of £150,000 or more, and antiforestalling measures (already in place) affect those earning £130,000 or more, see www.hmrc.gov.uk/pbr2009/pbrn18.pdf and www.hmrc.gov.uk/pbr2009/pension_factsheet.pdf . Again, it may be possible for small business owners to mitigate the effect of these provisions, but care is needed, pensions are a complex area for those whose income reaches £130,000 per annum, but maximising pension savings could reduce your marginal rate. For further information or details relating to pensions for contractors please click here .
Penalties on late payments of PAYE
Until April this year, you could pay your monthly or quarterly PAYE late, without incurring any interest or penalties. April 2010 signals the start of a new regime, in which the penalty could be as high as 13% of the late paid PAYE.
This Budget announced a further, more draconian provision, under which those who “have a history of serious non-compliance in terms of paying late or not paying their pay as you earn (PAYE) income tax” will be required to provide “financial security” to HMRC - in other words, to cough up a security deposit, similar to the ones required by utility companies from poor payers. The HMRC press release states that those who are required to give such a security but fail to do so will be committing a criminal offence; this in turn will be subject to a penalty of up to £5,000, see www.hmrc.gov.uk/budget2010/bn70.htm
It seems extraordinary that the government has moved from no sanctions at all on late-paid PAYE, to imposing criminal penalties, in the space of a few months. But, extraordinary or not, businesses must now be careful to pay PAYE on time, and keep good records - you may need to use these as evidence to ward off fines, sanctions or even criminal penalties.
2010 Budget summary was provided by Ascot Sinclair Associates - a firm of Accountants specialising in providing accountancy and tax services to contractors.
