Here at Caroola, we have been paying close attention to John Healey’s first budget as Chancellor of the Exchequer. In the run up to his speech and the publication of the budget report there was significant speculation as to what would be included to help tackle the cost of living crisis, whether the government would look to fund its announcements with tax rises and, most importantly, how this would affect the freelance and contractor workforce.
We’ve now watched the speech, read the report and had some time to digest the announcements.
So, what are the key takeaways?
Overview
The thrust of the budget was clearly to show commitment to tackling the ongoing cost of living crisis, offer support to certain sectors of small businesses on the high street, and to encourage investment and entrepreneurship in key industries whilst sticking to manifesto promises about fiscal responsibility.
At first glance, there may not appear to be much in the way of announcements that affect sole traders and owner managed companies, however behind the headlines there are a few points worth mentioning.
Cost of living
There was little deviation from pre-budget announcements, albeit a couple of surprises thrown in during the speech, as has become traditional. The key announcements were:
- An extension to the temporary 0% rate of VAT on qualifying domestic electricity supplies in Great Britain for another three months, until July 2027 saving and estimated £50 per household.
- A £100 payment for households in Council Tax bands A-D in England from January 2027 to assist with energy costs.
- Abolition of gas standing charges on domestic energy bills, aiming for delivery by the end of 2027 along with a consultation on extending this to electricity bills.
- Extension of parental pay to eligible self-employed fathers, partners and adopters in Great Britain, who are currently excluded from the system, from April 2029.
- Reform of the Carers Allowance Weekly Earnings Limit so that carers no longer lose their entire benefit for exceeding the limit by a single penny.
- Extension of the 5p cut on fuel duty from January 2027 to July 2027.
- Introduction of a Pension Tax Allowance to ensure that pensioners with a State Pension above the personal allowance are not brought into the tax system.
- The temporary increase of mileage to 55p per mile rate for the first 10,000 business miles has been made permanent and the mileage rate above 10,000 business miles will increase from 25p to 35p from April 2027.
- On 1 April 2027, the National Living Wage will increase by 3.9% to £13.21 per hour and The National Minimum Wage for 18- to 20-year-olds will also increase by 3.9% to £11.27 per hour.
- Introduction of the ‘Your First Home’ scheme, offering 20% equity loans to first-time buyers.
- Introduction of the new First Time Buyer ISA from April 2029. The product will retain the generosity of the Lifetime ISA, allowing contributions of up to £4,000 a year with a 25% government bonus.
Taxation
As expected, there were no changes to the main rates of tax and the Chancellor had already ruled out changes to the rates of Capital Gains Tax. There were however a few changes and one piece of sleight of hand in particular.
- Whilst the main rates of income tax are unchanged, income derived from assets, i.e. interest and rental income, already scheduled to increase by 2% from April 2027, will be subject to a further 2% increase.
- From April 2029, taxpayers who make Payments on Account will make smaller, more regular contributions towards their tax bill throughout the year, bringing payment closer to when income is earned.
- The lifetime limit for Business Asset Disposal Relief has been halved from £1 million to £500,000 from April 2027.
- A new Capital Gains Tax Founders’ Relief will be introduced from 6 April 2027, offering a reduced 10% Capital Gains Tax rate on up to £10 million of lifetime gains.
- A Young Entrepreneurs Allowance will be piloted, providing successful applicants with support towards their living costs during the first year of their business.
- The main rate of writing down allowances will be reduced by 2%, from 14% to 12% from April 2027.
- At the same time the main rate First Year Allowance (FYA) will be increased from 40% to 50%.
- The Trading Allowance will be tripled from £1,000 to £3,000 from 6 April 2027.
- ‘EMI2’ will be introduced to double the value of tax-advantaged options employees can hold from £60,000 to £120,000 from 6 April 2027.
How are contractors impacted?
Aside from potentially benefitting from some of the cost of living announcements, the increase to the mileage rates will no doubt be welcomed as these have remained static for 15 years. Increases to the NLW and NMW, whilst not unexpected, will add to the financial burden of those who have employees.
There will no doubt be some sighs of relief that there is no change to Capital Gains Tax other than the reduction in the lifetime limit for BADR. We will also be intrigued to see what the criteria for eligibility to Founders’ Relief will be, as at first glance this looks to mirror the old Entrepreneurs Relief before it was rebranded.
For contractors with a side hustle, the tripling of the Trading Allowance will provide some benefit and likely reduce reporting requirements for many.
Buy to let landlords however have clearly been hit with an increase in the amount of tax payable and we will take some time to digest the changes and whether this will mean that holding rental properties via a company rather than as an individual would be more beneficial.
Behind the Headlines
Not mentioned in the speech but contained within the detailed budget notes, there were some interesting points about the government’s intended direction of travel in relation to regulation and taxation. Amongst these, and pertinent to contractors were the following:
- The government is “launching a targeted, evidence-led programme to simplify specific areas of Corporation Tax, working with businesses and tax experts to reduce avoidable complexity, improve certainty and make the UK a better place to invest and do business in.”
- The government is “setting out an implementation roadmap for requiring VAT e-invoicing from April 2029, reducing administrative burdens and improving efficiency.”
- the government “will consult on expanding third-party reporting requirements for property income data, improving the information available across the tax system to support compliance while reducing unnecessary interventions and burdens for taxpayers who are meeting their obligations.”
- The government “has published a new multi-year plan to modernise the approach to the compliance of wealthy taxpayers. The plan sets out how HMRC will make better use of data, technology and specialist expertise to improve its understanding of wealthy taxpayers.”
- The government “is modernising the rules that determine how distributions from companies to individual (non-corporate) shareholders are taxed, ensuring that similar transactions are taxed consistently through a clearer framework. This will reduce opportunities for well-advised taxpayers to structure how profits are taken out to secure a more favourable tax treatment that is not available to other taxpayers. The government will continue to engage with stakeholders on the technical detail of the reforms and will consult on draft legislation ahead of implementation in April 2028”
This latter point is of particular interest as it would appear that the government is increasingly looking at how funds extracted by limited company directors and shareholders are categorised (and taxed.) We will eagerly await further detail on this and look to provide commentary on what this means for you as we are able to do so.