Yesterday’s Emergency Budget delivered several important announcements that will affect self-employed workers in the UK. The Government states that it stands up for the flexible workforce and supports hardworking British people. However, it is disappointing to see that these steps are increasing the tax burden for contractors.
Here, we help break down the changes announced and what they mean for you:
From April 2016, Dividend Tax Credits will be removed and replaced by a Dividend Tax Allowance of £5,000 per year. Any additional dividend payments over this Allowance will be taxed at the following rates:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers
This will increase the tax liability for shareholders of Limited Companies who take their income in the form of Dividends. Despite this, working as a director of your own Limited Company will have considerably better taxation flexibility than compared to working as an employee, via an umbrella company or Pay As You Earn (PAYE).
Travel & Subsistence:
As expected, the Government has announced its plans to publish a consultation document to consider the removal of this for contractors. This clampdown aims to tackle the abuse of tax relief on travel and subsistence.
If a change to this relief is confirmed, the appeal of working through an umbrella company will not be as attractive as it once was.
However, if you are a director of a Limited Company and your tax status falls outside IR35 you remain unaffected by this change.
To find out more about this, read our Travel and Subsistence blog.
George Osborne has requested a review into existing IR35 legislation. The Government hopes this review will clarify IR35 and improve the fairness of this taxation grey area.
The future of IR35 has been put into doubt as the legislation needs a significant review. How it will be enforced is under scrutiny and above it hangs a large question mark.
We will continue to bring you up to date information as this develops.
There will be a reduction in the £40,000 annual pension allowance where income, including pension contributions, exceeds £150,000.
This means that the pension allowance will reduce by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000.
How this will be applied has not been disclosed but the measure echoes similar adjustments made to the Personal Tax Allowance for high-income earners.
In addition, further reviews will aim to implement reforms to pension tax relief. These will look into the possibility of aligning the taxation of pensions so that they are similar to the tax applied to ISAs.
Furthermore, the Lifetime allowance will be reduced from £1.25m to £1m from April 2016.
The Employment Allowance:
The National Insurance Annual Employment Allowance is increasing as of April 2016 from £2,000 to £3,000.
However Limited Companies where the director is the sole employee will not be eligible to claim the employment allowance from April 2016.
For more information about this and how we can help, contact our specialist consultants.
On a Positive Note:
Despite the overall negative impact on contractors, as we mentioned in our blog yesterday, there are also some positive outcomes from the Budget.
George Osborne has confirmed that he will:
• Raise the Personal Tax Allowance to £11,000 from April 2016.
• Cut Corporation Tax to 19% in 2017 and a further 1% by the end of the decade.
• Increase the threshold for Higher Rate Tax to £43,000 from April 2016 and introduce a long term plan to raise this to £50,000.
• Inheritance Tax Allowance has increased by £175,000, giving any individual a sum of half a million pounds tax free allowance when passing on wealth to a child. Your spouse has the same allowance, and therefore you could pass on a property worth up to £1m to your children tax free.
• Free fuel duty.
• Rent-a-room tax relief has increased to £7,500.
Long-term growth and opportunities for the UK are showing signs of stability. However the effects of this budget will largely be felt at the start of the next financial year and the government’s announcements come as an immediate disappointment.
At Churchill Knight and Associates Ltd, we have been helping contractors and freelancers since 1998, which makes us one of the most experienced and professional contractor accountancy service providers. If you would like more information about switching from employment to contracting then our expert consultants can provide a free, no-obligation consultation to discuss your options and find out if contracting will suit you.
See the most recent Travel and Subsistence news in our Autumn Statement 2015 blog.