Tax changes announced in Gordon Brown’s March 2007 Budget will make little difference to most self-employed people this year, but herald a major shake-up starting April 2008.
The abolition next year of the 10 per cent income tax rate means that those on low incomes – which will include many engaged in starting a new business, may be worse off in financial year 2008 to 2009. That is unless they claim any tax credits due to them.
Growing role for tax credits
A key message of the Budget lies not in the headline-grabbing changes to income tax rates, but in the growing role that working tax credit and child tax credit are playing in the personal tax system. PRIME believes it is more important than ever that self-employed people claim tax credits they are entitled to, otherwise they will lose out.
Here’s a summary of the major tax changes. Note that if you are a sole trader or a partner corporation tax is not relevant to you as you will still be taxed via the income tax system. If on the other hand you have decided to set your business up as a company then it has a separate identity. This means that as well as paying income tax as an individual on any dividends or salary you receive, the profits of your company are subject to corporation tax.
Few changes this year
There were no major surprises in personal taxation for this coming financial year (6 April 2007 to 5 April 2008), with tax rates and thresholds all as outlined in the Chancellor’s earlier pre-budget statement in December 2006. However, for small firms paying corporation tax on their company’s profits, the rate is going up immediately (from April 2007) from 19 per cent to 20 per cent.
Big changes start in 2008
The major changes to personal taxation start in in April 2008, with both income tax and the tax credit system shaken up.
Income tax: The 10% starting rate for those on low incomes disappears, and the basic rate is cut from the present 22 per cent to 20 pence. This leaves a simpler structure of two just rates - the 20p in the pound basic rate and a 40p higher rate.
But you’ll go straight on to the 20 per cent rate as soon as your income exceeds your personal allowance. In 2008 the standard tax free allowance for those under 75 will be £8,990, up from £7,280 now.
Tax credits: This makes tax credits critically important. If you fail to claim them despite being eligible you are likely to be worse off if your income (or net profit) is under around £17,000.
For an explanation of the way tax credits are calculated see PRIME’s free booklet. Tax credits are a kind of reverse income tax paid to those on low incomes - including the self-employed.
The good news for those qualifying for working tax credit is that you will be able to earn £1,200 more before you lose any of your entitlement. From April 2008 the income threshold for working tax credit calculations is increased from the present level of £5,220 to £6,420 per annum.
However the bad news is that once your income (or net profit) is over the threshold the amount of working tax credit you will get tapers off more quickly. From April 2008 the “withdrawal rate” on tax credits will be 39 per cent rather than the present 37 per cent, which means you will lose from your award 39p in the pound for every pound your income exceeds £6,420 per annum.
Child tax credit: Anyone who is eligible for working tax credit (WTC) who is caring for children under 16 is likely to also be eligible for child tax credit (CTC).
CTC is complicated but the amounts involved make it worth investigating, and the taper for CTC is much more gentle than for WTC. As your business income builds up you will lose WTC sooner than CTC. From April 2008 the value of the child element for each child rises to £2,080 a year.
Corporation tax: The Chancellor has decided to tax the profits of small company more and of large companies less, partly to reduce the incentive to set up lots of small phony companies.
For small companies the rate rises in one per cent steps over the next three years to 22 per cent by April 2009, starting immediately in April 2007 with a rise from 19 per cent to 20 per cent. Meanwhile the rate for large companies (profits of over £300,000 annually) will come down from the present 30 per cent.
But on the plus side small firms will be able to claim 100 per cent tax relief for new capital investment up to £50,000.
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Wednesday 7th March 2007