IR35, limited company contractor dividends, umbrella company and personal service company expenses and even buy-to-let mortgage tax relief have been targeted by the Chancellor George Osborne in his Summer Budget.
At the same time, the corporation tax headline rate will fall to 18% by 2020, the personal allowance is increasing to £11,000 and the higher rate tax threshold increases to £43,000 in April 2016, alongside frozen fuel duty.
All these measures would have been cause for contractor rejoicing in a normal budget. But this Budget has been far from normal for contractors.
“Contractors alongside all of the UK’s hardworking small businesses have been targeted with a raft of measures that demonstrate breathtaking duplicity from a government that only last week promised to review the challenges facing the self-employed,” highlights ContractorCalculator CEO Dave Chaplin.
“The bottom line is that contractors will be paying more tax from April 2016 and may well be facing a renewed threat from a reformed IR35. Hardly the actions of a government led by a Prime Minister who described contractors as ‘key part of our long term economic plan’ and who would be ‘looking at what can be done to provide more security and peace of mind for people wanting to work for themselves’.”
Summer Budget measures affecting contractors
According to the Treasury’s Summer Budget 2015 document, the key measures impacting on contractors are:
- IR35 is to be reviewed by HMRC and the government plans to engage with stakeholder businesses to see how it can be better administered. The Treasury expects to generate an additional £400m from an enhanced/revamped IR35
- Dividend tax is to be reformed, with the existing dividend credit being scrapped and new rates of dividend tax being introduced at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. There will be a new £5,000 tax-free Dividend Allowance replacing the previous dividend tax credit. Basic rate taxpayers face extra tax bills of £2025 a year from April 2016, and higher rate tax payers will pay an effective rate of 46% tax
- A consultation on expenses abuses by umbrella company contractors and personal service companies (PSCs) is planned to coincide with the Summer Budget to potentially restrict tax relief on expenses
- The headline corporation tax rate is due to decrease to 18% by 2020, after first falling to 19% in 2017
- Personal allowance is to increase to £11,000 from 2016; higher rate tax threshold will increase to £43,000. However, there is no mention of changing National Insurance Contributions (NICs) thresholds
- Tax relief for buy-to-let mortgages will be reduced to basic rate taxpayers only, phased in over four years starting in 2017
- One person limited companies will no longer qualify for the Employment Allowance, although it will be extended to £3,000 for qualifying businesses
- Fuel duty is being frozen for another year, but vehicle excise duty (VED) is being reintroduced with three bands
- Inheritance tax is being increased, so contractors with estates worth less than £1m will be able to pass on their assets to their children without paying IHT
HMRC is being given a £750m boost to tackle tax avoidance, tax evasion and the back economy.
Further analysis will be published on ContractorCalculator as the implications of the Chancellor’s Summer Budget are fully understood.