Small business tax, finance and legal changes for 2020

A number of tax, finance and legal changes are coming into play for UK small businesses this year. Despite 2019 being an unusual year as it was the first year without a Budget for the past 120 years, there are still many changes on the horizon for 2020.

Here are the small business tax, finance and legal changes you can expect to see as a small business owner this year.

Small Business Tax, Finance and Legal Changes

1. Corporation tax

Over the years, Corporation tax has changed dramatically. In the 1970s, the tax rate for corporations was 52%, but now it’s at a record low of 19%. The small business corporation tax rate was scheduled to be reduced even further to 17% from April 2020. However, the Conservative manifesto declared they would maintain the 19% rate into the next financial year.

In April 2020, we’re also expected to see a cap on the repayable Corporation Tax relief available under the Research & Development scheme for SMEs. This will mean that the payable tax credit amount that a loss-making SME can receive in a year will be capped at three times the businesses’ total PAYE and NICs liability.

Sound complicated?According to our research, British SMEs spend 12 working days per year on tax compliance. If you’re not 100 per cent clear on small business tax or if you're utilising small business tax relief, get it in touch to see how we can help free up your time.

Related: Reducing the corporation tax bill of an SME

Related: Making the most of small business tax relief

2. National insurance

Most UK employers operate PAYE as part of payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.

An employee’s National Insurance contributions are paid on earnings, deducted from gross wages by the employer, with no action required by the employee. Currently, the

National Insurance threshold stands at £8,632 per year, but this is proposed to rise to £9,500 in April 2020.

Note: This means if you have employees who make less than £9,500 you will pay no National Insurance contributions for that employee. The National Insurance threshold is expected to be raised further in the future to become more in line with the Income Tax threshold of £12,500.

3. IR35 off-payroll

Changes to IR35 off-payroll are also being rolled out in April 2020. The responsibility of deciding on IR35 status of a contract worker is being moved from contractors to medium and large private sector companies that hire these workers.

The IR35 off-payroll working legislation can apply if a contract or self-employed worker provides services through an intermediary. If the rules do apply, the organisation paying the individual’s own limited company will be accountable for deducting and paying the necessary employment taxes and NIC through PAYE.

Moving forward, employers will now need to reassess contract workers they hire and decide if they should be classified as a full-time employee or self-employed for tax purposes. The changes are expected to ensure individuals working like employees through their own limited company predominantly pay the same tax and NIC as workers who are employed directly.

Note: The Conservatives have pledged to review these proposed changes, so the tax rules could be scrapped or changed further.

4. Entrepreneurs relief

Entrepreneurs Relief can reduce capital gains tax rates on the disposal of specific business assets from 20% to 10%. Changes to entrepreneurs relief in 2018/19 reduced the number of shareholders who are entitled to claim the relief and created complexity in determining the validity of claims.

For the 2020/21 tax year, more significant changes are expected to come into play, which is likely to mean less relief when selling a company. We recently reported that a shocking 58 per cent of family-run businesses in the UK do not have any form of succession plans in place.

Business owners who are considering selling their business should look into exit planning, and keep a close eye on any further changes as it may be best to limit the amount of cash being held in the company.

Get in touch with our friendly team today on 0207 043 4000 if you are interested in a business valuation.

Related: Inheritance Tax: Take the sting out of selling your business

Related: Changing Hands: Buying and selling a business

5. Minimum wage increase

On 1 April 2020, the minimum wage is expected to increase from £8.21 to £8.72 for workers aged over 25. This is a 6.2% rise and is expected to benefit nearly 3 million workers. With the increase to the National Living Wage, this is an important time to consider if you need to start paying any of your employees a higher wage.

Read more: Small business best practice: Minimum Wage

6. Employment law

There are some key Employment Law changes changes that are expected to come into effect in April 2020. A new law on contracts is set to come into play and states that “all new employees and workers will have the right to a statement of written particulars from their first day of employment.”

Previously, the employment law legislation stated that employees only had a right to this if they had been continuously employed by a business for more than a month. You’ll need to issue contracts for employees who are considered full-time workers.

Additionally, a new parental bereavement law is set to come into effect. At the moment, employees have no right to take time off during child bereavement cases, but this new law offers parents the right to take two weeks of leave after the loss of a child under 18 or a stillbirth following 24 weeks of pregnancy.

How holiday pay is calculated is also seeing changes. Currently, holiday pay is calculated by looking at what a worker has been paid in the past 12 weeks. However, the holiday pay reference period will be increased to the previous 52 weeks a worker has worked and been paid, discarding any weeks not worked. This change will predominantly impact workers in seasonal or atypical roles.

Read more: The importance of an Employee Handbook and Contract of Employment

Related: Employment Tribunals costing UK employers £8500 on average

7. Salaries

Over the next year, there is expected to be a 1.1% increase in employee salaries, according to ECA International. This comes to an estimated £28 per month before tax or an annual rise of £344.62.

Note: The rate “real salaries” are forecast to increase is much lower than between 2018 and 2019. Because of uncertainty surrounding Brexit, real term salaries for 2020 are expected to be about £20.44 less than they were in 2019.

Related: What salary should I take from my own business

8. Employment allowance

There are also proposed changes coming to Employment Allowance rules in April 2020. As a tax break for employers, the allowance will now only be available for SMEs with a NIC liability of under £100,000. This is a way for small businesses to reduce the amount of tax they pay.

9. Making tax digital for business

For the 2020/21 financial year, small businesses will be required to invest in digital bookkeeping as part of HMRC’s making tax digital for business initiative. For the small businesses who keep track of their financial records through Excel or on paper, they’ll need to digitalise certain records. Many small businesses will likely have to purchase some kind of basic small business accounting package for the first time in order to comply.

Looking for small business accounting software? We are proud to be the official partners of Xero; the hugely popular online accounting software tailored to modern business requirements. Xero is web based, so both the accountant and small business owner can access the same data simultaneously. You can click the link to find out more about the benefits of working with a Xero accountant.

So, whether you want to digitise your small businesses’ bookkeeping through affordable online accounting or you’d like to come in and speak to a friendly face, we can help.

Related: Xerocon: To make life better for people in small businesses

Read more: Best cloud small business accounting software 

Related: Making Tax Digital for VAT

Optimism is in the air

Despite all the proposed changes, small businesses are hopeful about the future. A study by VistaPrint revealed that 86% of small business owners believe they will achieve their key goal during 2020, regardless of political and economic uncertainty surrounding Brexit and rising business costs.

The main goals range from significantly increasing business growth and revenue to generating repeat business and reaching new customers. The study also found that small business owners in the UK are predominantly feeling “prepared”, “confident” and “optimistic” for 2020, and tax, finance and legal changes aren’t dampening small businesses’ entrepreneurial spirit in the new year and new decade.

Final thoughts

If small business owners plan for the future changes coming into play in April, the more likely they will be prepared, and they’ll be able to focus more time on achieving their top goals for the 2020/21 financial year. More information regarding tax, finance and legal changes will likely come forward during the Budget on 11 March.

We can help with all your tax, finance and legal business compliance, from getting you set up with cost effective bookkeeping or payroll support, to ensure you're compliant in employment law or shareholders agreements.

Give us a call on 0207 043 4000 for more information on our small business accounting services, or try our instant accounting quote tool. Or, if you are looking for employment law solicitors, employment law advice, shareholder advice or general small business legal advice, give us a call today to find out how we can help.