Spring is in the air… which means it’s time for the usual Budget surprises contained in the Chancellor’s famous red briefcase. iContract summarises the key aspects that affect us as contractors:
The first thing to note is that this is the last spring budget. The government will now only have autumn Budgets. This is generally good news as we’ll all get more notice of any tax changes, which usually take effect at the start of the following tax year in April.
It is rare that the self-employed and contractors make the headlines but, in this Budget, they are described as the “biggest losers”, according to IPSE, which represents independent professionals. In particular:
– National Insurance (Class 4) rates for the self-employed will rise by 1% to 10% from April 2018 and another 1% from April 2019 to 11%. However, this rate only applies for profits between £8,060 – £43k. For profits above £8,060, national insurance rates remains at 2%. This coincides with the abolishment of the Class 2 contribution but will still mean an overall rise for anyone earning over £16,250; and
– For those using a (personal service) company and paying themselves via dividends, the tax-free dividend allowance will be reduced from £5,000 to £2,000 from next year.
Why all the attention?
The changes have made the headlines mainly because:
i) the rise in national insurance contributions is effectively a broken Conservative manifesto promise
ii) the Budget was otherwise fairly unremarkable.
Whilst no one likes a tax increase, the amount of media attention to these is disproportionate to the material impact for successful contractors, especially with a cut in corporation tax on the way (see below). Please however speak to your accountants before the changes kick-in for the best advice.
The changes today follow other recent changes to IR35 (particularly for contractors in the public sector) and dividend taxation, which are covered in other iContract blogs. The moves have been made as a direct result of contracting and self-employment having become more popular over the last decade in particular (meaning a consequential reduction in national insurance & tax income by the Treasury). Single-director companies now account for 37% of all incorporated companies, up from less than 1% a decade ago.
The Government’s efforts to minimise the tax advantages of working for yourself (whether through a corporate entity or not), compared to being traditionally employed, will continue. Chancellor Hammond made his view very clear today: “People’s choices for employment should not be driven by tax implications”.
This is frustrating for contractors, since an equalised tax treatment ignores the extra risks and lack of protections that contractors have compared to employees. Nonetheless, iContract believes that the market for contractors will continue to grow and that there remain many advantages to contracting, not least flexibility and control. The economy as a whole and companies are moving in a direction that will continue to need specialist, non-permanent and project roles.
So what is the exact loss for contractors then?
Assume you are on a day rate of £500, if you have worked full time (20 days a month, 12 months a year), your annual earning is £120k. Let’s say you have expensed £20k on travel, business costs and equipments, your net profit is £100k. Your national insurance contribution in tax year 2017 will be (£43k – £8,060) x 9% + (£100k – £43k) x 2% = £2,005. Now in tax year 2018, your national insurance rate on the amount between £8,060 to £43k will rise 1%. This leads to (£43k – £8,060) x 1% = £349 increase in national insurance contributions, directly out of your pocket. Then in tax year 2018, you will have to pay another £349 more.
The dividend tax allowance changes means you will have to pay dividends tax on the £3,000 which was previously exempted. If you are on basic rate, you will be paying £3,000 x 7.5% = £225 more. If you are on a higher rate, you will be paying £3,000 x 32.5% = £975 more.
Therefore, for a contractor whom is on £500 per day as per above example, he/she will be losing £574 per year (£349 on national insurance contributions and £225 on dividend taxes) on a basic dividend rate, or £1,324 on a higher dividend rate.
In other Budget news that may be relevant to you:
– The Personal Allowance from 6 April 2017, will increase to £11,500 (from £11,000) and the higher rate threshold to £45,000 from (from £43,000).
– The annual ISA allowance increases from £15,240 to £20,000 from 6 April 2017.
– Corporation Tax rates will reduce from 20% to 19% for the years 2017 to 2019, and to 17% for 2020
– Alcohol duty rises have been limited to the rate of inflation, meaning roughly 2p on the price of a pint, 36p on a bottle of Scotch, 10p on a bottle of wine from Monday. Tobacco duty is rising too.
– A tax-free childcare policy launches next month, and from September, parents will be eligible for 30 hours a week of free childcare.
– A £5m fund has been established for ‘returnships’ to public & private sector, to help people back into employment after career breaks.
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