The negative impact of the budget on contractors

Yesterday was the first Conservative-only budget in 19 years and it was not great news for contractors, in fact it felt like a direct attack on the country’s temporary work force. Below we cover the four areas the budget negatively impacts contractors and freelancers.

Dividend Tax Reform

From April 2016 the dividend tax credit is to be removed and instead replaced by a £5,000 dividend tax free allowance. On dividends over £5,000 the following new tax rates will apply:

* Basic rate tax on dividends 7.5%

* Higher rate tax on dividends 32.5%

* Additional rate tax on dividends 38.1%

The impact this could have on a contractor’s personal tax bill is potentially huge. Contractors who fall into the basic rate tax bracket would previously have had no personal tax to pay whereas now dividends of £42,385 would attract a personal tax bill of £2,009 at the current tax rates.

Those who fall into the higher rate tax bracket and already had a personal tax bill will see an increase in the effective rate of tax by around 6%.

As this is a major change we will publish another article shortly covering these changes in more details along with any recommendations we have to try to combat this as much as possible.


Employment Allowance

This has allowed contractors to increase their annual salary up to the personal allowance (£10,600 for 14-15) and still avoid paying any employer National Insurance.

From next year this will be scrapped where the director is the sole employee, which will be the majority of Personal Service Companies (PSC’s). This will cost directors around £203 per year.

What remains unclear for now is whether this applies to those companies who have their spouse on the payroll.



The chancellor made a brief but very important comment on IR35 in his speech

“We’re consulting today on how to deal with the increasing abuse of the rules around disguised employment when working through a personal service company.”

Looking through the full budget report the government issued this statement “The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015. “

These statements show that HMRC do not think that the IR35 legislation is currently working and that this topic remains very much on their radar. Rather than offering the clarification many were hoping for this has cast further doubt over IR35.

This means that it is more important than ever to take a very thorough look at your employment status and ensure you do everything possible to protect yourself. For more help and advice on how to do this speak to one of our contractor accountants.


Expense Rules

A consultation document has now been released following the announcement made in the March 2015 budget to disallow travel & subsistence expenses for those working through umbrella companies or those working through PSC’s who are “supervised, directed and controlled”.

We will keep you updated on this as the consultation progresses.


What should I do?

Even with the above changes a Limited company still remains the most tax efficient legal way to manage your finances for the vast majority of contractors and freelancers, if you are in any doubt then feel free to get in touch to discuss your situation with one of our expert contractor accountants.

There is some good news though with the main positive being the reduction in Corporation Tax rates over the next 5 years to 18%, although this will only make a small improvement to the hefty tax rises above.

Take a look at our main Budget blog for a wider look at the announcements made

Tags: Dividends, Expenses, News, IR35, Self Assessment

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