Fiscal drag to trap more freelancers into 40% tax bracket
By Daniel Fallows
As the UK faces a cost-of-living crisis with inflation reaching its highest level for 30 years and the Bank of England forecasting that inflation will rise further to 8% this year – Rishi Sunak has been astute to take urgent evasive action in the Spring Statement as he did during the Covid-19 outbreak.
While freelancers and SMEs are braced for the 1.25% increase in National Insurance Rishi Sunak has taken steps to protect the lowest paid and SMEs by increasing the National Insurance threshold by £3,000 to £12,570 and increasing the employment allowance for businesses with employees, meaning there will be no tax to pay on the first £5,000 of employers NICs due.
However, it is worth remembering that there will be more pain to come as next year businesses face the first corporation tax rise for almost fifty years – a move that increases corporation tax by almost a third from 19% to 25%. However, again the smallest SMEs will be protected as corporation tax will remain at 19% for the first £50,000 of profits.
The announcement of the 1% cut in the basic rate of income tax in 2024 will provide some welcome relief. However, more and more freelancers are going to be pulled into paying higher rates of income tax too as in March 2021, the Chancellor announced that personal allowances and income tax thresholds will be frozen until 2026.
This is going to result in around 1.2 million additional workers being brought into the 40% tax threshold – this stealth tax increase, known as fiscal drag, will rake in an additional £10.9bn for The Treasury.
With stagflation now a real threat and British households seeing costs rise and incomes squeezed it has never been more important for freelancers and SMEs to get expert advice to ensure that they make every penny count.
Daniel Fallows is Director at Gorilla, a specialist accountancy firm for freelancers