The Chancellor delivered budget 2017, the first of the year. What are the key tax changes affecting SMEs?

The good news is that there weren’t many tax changes announced in the Spring Budget 2017. However, two measures were announced that will hit small business owners.

Increase in Class 4 NI. The main rate of Class 4 NI is to increase from 9% to 10% with effect from 6 April 2018 and from 10% to 11% with effect from 6 April 2019. For a self-employed individual with £30,000 trading profits, this will increase the Class 4 NI bill for the 2019/20 tax year by about £430. The abolition of Class 2 NI from April 2018 will partially reduce this increased NI but only by just under £150 a year.

Tip. Deferring capital purchases into an accounting period falling within the 2019/20 tax year could lead to a higher rate of tax relief on the asset cost.

Dividend allowance reduced. The Chancellor has dealt another blow to limited company director shareholders by cutting the tax-free dividend allowance from £5,000 to £2,000 with effect from 6 April 2018. This means that a director shareholder paying tax at the basic rate will pay an extra 7.5% tax on £3,000 of dividends – a £225 tax hike. It will be considerably more for higher rate taxpayers at 32.5% of £3,000 = £975.

Making Tax Digital. One welcome measure for small businesses is that Making Tax Digital is to be suspended by one year, i.e. until April 2019, for businesses with a turnover under the VAT threshold.

The key changes are a staggered 2% increase in Class 4 NI for the self-employed and a reduction in the dividend allowance to £2,000 from April 2018 for director shareholders.