Changes to tax legislation

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Changes to tax legislation affecting limited company contractors

Published on Tuesday, April 5, 2016

Written by Alex Cadman

The new tax year is only one day away, marking the arrival of several changes to tax legislation that will have an impact on contractors. George Osborne announced the changes during the Summer Budget 2015 and Autumn Statement 2015 in a move to tackle alleged tax avoidance in the contractor industry.


The two areas on which the Chancellor has focused most of his energy are Travel and Subsistence (T&S) and Dividend Taxation. However, there are changes to Income Tax and Corporation Tax that will represent a positive change for many contractors. We discuss all of the above in our blog, and highlight how you may be affected as a contractor.

Travel and Subsistence

One of the issues at the forefront of the conversation surrounding legislation changes is Travel and Subsistence. As of 6th April 2016, any contractor employed through an umbrella company, or any limited company director operating inside IR35, will no longer be able to claim Travel and Subsistence expenses and receive tax relief on them. However, contractors who operate outside IR35 will still be able to claim tax relief on Travel and Subsistence.

At Churchill Knight & Associates Ltd, we have been at the forefront of the Travel and Subsistence changes, and will continue to do so. For now, you may find more information on our previous blogs on Travel and Subsistence.

Income tax: Personal Allowance and basic rate limit

For the tax year 2016/17, the Personal Allowance for income is increasing from £10,600 to £11,000. It will further increase by £500 for the tax year 2017/18. Additionally, the basic rate threshold is increasing from £31,785 to £32,000 for 2016/17. This will result in the higher rate tax threshold increasing to £43,000 in 2016/17, and to £45,000 in 2017/18 as announced in the Budget 2016.

Dividend Taxation

To date, dividends have only been taxed at the higher or additional rate tax level, with higher rate earners taxed 25% on net dividends, and additional rate earners taxed 30.56% on net dividends.

Come 6th April 2016, all tax bands will be subject to dividend taxation, with the exception of a tax-free dividend allowance of £5,000. Going forward, those in the basic rate tax band will pay 7.5% on their net dividends, higher rate taxpayers will pay 32.5% on their net dividends, and additional rate taxpayers will pay 38.1% tax on their net dividends. See the table below comparing the changes to dividend taxation:

Dividend tax rates
up to 5th April 2016

Dividend tax rates
from 6th April 2016

Tax band

Effective dividend tax rate

Tax band

Effective dividend tax rate

Basic rate (and non-taxpayers)

0%

Basic rate (and non-taxpayers)

Personal allowance of £5,000; all dividends thereafter taxed at 7.5%

Higher rate

25%

Higher rate

32.5%

Additional rate (after April 2013)

30.56%

Additional rate

38.1%

 

It is now more important than ever, as a Director of your own limited company, to conduct dividend tax planning. If you are a Director concerned that your take home pay will decrease because of this new legislation, or that you will not be able to set aside enough dividend income to pay your due tax in the 2016/2017 tax year, do not worry. As expert contractor accountants, Churchill Knight has developed a dividend tax planning strategy to help you tackle this issue and continue to maximise your take home pay.

If you are a client of Churchill Knight, you should have received our new Tax Planning Guide and you can contact your account team for more information on this.

If you are not currently a Churchill Knight client but would like more information on how we are providing clients with dividend tax planning services, telephone our Personal Tax team on 01707 671648 or email us here.

Corporation Tax

On 1st April 2017, the Corporation Tax rate will fall to 19%, and decrease further to 17% by 2020. If you are a contractor and a Director of your own limited company, this is good news as it could mean an additional 1% increase in your take home pay.

How we can help you:

As a firm of specialist UK contractor accountants, we strive to keep you up to date with the latest contractor industry news and changes surrounding tax legislation. As expert accountants, we have been helping contractors operate their limited companies since 1998. We also provide unlimited support to all of our clients to help them navigate through legislation changes.

If you are thinking of becoming a contractor, or if you are a contractor with your own limited company and are looking to switch accountants, you could maximise your take home pay with our premier limited company accountancy service. In addition to providing unlimited support, we will handle all of your invoicing, payroll, filing of accounts and much more.

If you would like more information about the changes coming into effect in April 2016, leave a comment on our blog or email us at enquiry@churchill-knight.co.uk. You may also find out more about our contractor accounting services using the buttons below.

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