UPDATE: Many of the statements outlined below have been reversed by changes in government policy in October 2022. IR35 changes will not be repealed, income tax cuts have been dropped, the increase in dividend tax and corporation tax will continue.
You won't have been able to avoid the news around changes in government and a mini-budget last week aimed at tackling the UK's cost of living crisis. Whilst there are debates around who it benefits most, the self-employed and small businesses are often bombarded with headlines around what it means for them - and over the past five years, the number and frequency of changes to taxes and legislation effecting their businesses seems to have only increased, causing continual change, disruption and often confusion.
This September's mini-budget has, in many ways, reset a number of things back to what they were a few years back, so in lots of ways, they're undoing previous changes, so we are 'going back' to how things were, but being on top of what those changes are is important, and trying to find reputable and objective sources of information really helps sort the points of view (whether something is good or bad) from what you need to be aware of.
We've listed the most significant changes impacting the self-employed, limited company owners and freelancers, in order to help you navigate the changes.
1/ IR35 changes have been reversed
From April 6, 2023, the rules around 'determination' of whether contracts are inside or outside of IR35 fall back to contractors - as they were prior to 2017 and 2021. IR35 has not been scrapped, only the recent revisions. In practise - this means where your client was defining whether a contract was 'inside' or 'outside' of IR35 now falls back to you as a the supplier.
IR35 or "Off-payroll" regulations do still apply - i.e. if your relationship with a client behaves like an employer/employee relationship, HMRC can still (and will still) investigate whether additional tax and national insurance liabilities exist. What the prior changes meant was that the payer, your client, was responsible (and mostly liable) for ensuring the right tax was being paid - that falls back once again to you.
We're going to write a slightly longer article on IR35 in the coming days.
2/ NI increase reversed
In April 2022 the rates of National Insurance increased by 1.25% for a year, and plans in place to replace the increase with a "Social Care Levy" moving forwards from 2023. Those changes have been walked back.
From November 6, 2022, NI rates will be:
Class 1 Employee’s NI: 12%
Class 1 Employer’s NI: 13.8%
Class 2 NI hadn't changed in 2022, and no changes in this mini-budget either.
Class 4 NI for the self-employed: 9%
3/ Income tax rates cut to 19%, and 45% rate scrapped
The basic income tax rate has been dropped by a penny on the pound from April 2023. This affects the basic tax you pay in your income. The top-earner rate of 45% has been scrapped. For the self-employed who pay themselves via PAYE or do an annual tax-return to calculate their income tax, this will offer an increase in your income after tax.
4/ Corporation tax increase cancelled
A planned increase in the Corporation Tax rate from from 19%-25% has been scrapped, so for the self-employed who operate as limited companies, this means no change.
5/ Dividend Income Tax Increase reversed
The rate of Income Tax charged on dividend income was increased by 1.25% in April 2022, but this too has been cancelled from April 2023, so dividends be taxed at 7.5% for basic-rate earners, and 32.5% for higher-rate individuals.
So, in most cases affecting the self-employed, we haven't seen a reduction in taxes - but rather 'holding' at the rates from prior to 2022, or removing planned increases. So whilst you might not need to be putting additional money aside for tax - changes to IR35 will affect how you're working with your clients, and continued increases in the rate of inflation and cost of living mean that your budgets will be hit harder, even if its not by HMRC.
Dealing with changes to your company and personal taxes.
Change is a constant when self-employed - new laws, taxes, processes and requirements seem to come thick and fast for small business owners, and staying on top of them is important.
We understand that for many, talking about money is not easy, but it's important to remember that when you're self-employed, it's not a good strategy to ignore the news around things like budgets or tax changes - there is almost always important information contained which you will need to be aware of.
Financial literacy plays a big role in our mental health - often we can hide from the topic if we feel it overwhelming. But by engaging with the right information and support, we can often discover it isn't as complicated as expected.
It's important to focus on the objective facts, rather than the many opinions. No matter your point of view on whether this budget is a good or bad thing for the UK - you will need to spend some time understanding if the changes require you to do something different within your business. We always recommend Money Saving Expert as an impartial source of information on financial change in the UK, d
Working with a good accountant will often mean that they will provide you with some support to navigate the changes, and ensure you're covered, especially if it means you need to put away more money each month to cover increasing tax liability.
Many of our members also work with Maslins and Gold Stagg as accountants - both specialising in the self-employed and small business accounting. It's really important to partner with a specialist who understands small businesses, so they can give you the best advice. Many of our members at Leapers use FreeAgent for their accounting software, which has built in tax rates and notifications, as well as resources on their website.
And of course, our community are able to chat through how they're reacting to and dealing with changes in things like tax or legislation. Whilst none of us are able to give financial advice, being able to chat with others who are going through similar experiences and have similar questions helps remove the feeling that you're having to deal with this on your own.