Along with the expected political rhetoric, there was a mixed bag of announcements in yesterday’s budget, many of which are particularly relevant for small businesses and freelance contractors.
Some of the key headlines were:
- Corporation Tax will be reduced to 19% in 2017 and 18% in 2020 - a reduced burden on all small businesses and limited company contractors
- The tax free Personal Allowance will increase to £11,000 from April 2016, increasing the amount that can be earned tax free
- The higher rate tax threshold will increase to £43,000, increasing the amount of income that can be earned before the higher rate tax band is applied
- A new £5,000 tax free dividend allowance replacing the current dividend tax credit and making the first £5,000 of dividends tax-free. From April 2016, dividend tax rates will be changed to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for the additional rate taxpayers earning more than £150,000 a year
- The Employment Allowance will increase to £3,000 from April 2016, though will not be available to single-director companies with no employees
- Reduction in the pension tax relief for earners above £150,000 by reducing the Annual Allowance to a minimum of £10,000 from April 2016
- The Annual Investment Allowance will be increased to £200,000 from January 2016 - this means businesses can purchase this much in the way of qualifying assets and receive a corporation tax deduction on the full amount
- The introduction of a mandatory “Living Wage” of £7.20 per hour to be introduced for those over 25 from April 2016, with a target of £9 per hour by 2020 (the current national minimum wage is £6.50 for those over 21)
- A consultation on the abolition of allowing workers of umbrella companies to claim travel to work and subsistence expenses
Specific Items for Contractors and Freelancers
The changes to the dividend rates outlined above are likely to mean that many freelance contractors operating through a limited company will see an increase in their tax bill. However, it is also already clear that operating through a limited company structure will still be the best way of working for most professional contractors and will continue to be far more financially rewarding and tax-efficient, than working through an umbrella company or directly via agency payroll, particularly when new benefits such as the reduction in corporation tax are factored in. In due course, when all of the finer detail is known, we will be able to calculate tax changes on a case-by-case basis and to ensure that all tax arrangements for our clients are as efficient as possible, before the changes next April.
It seems clear, however, that working through an umbrella company is likely to become less financially beneficial than is currently the case, with the proposal to simply prevent workers employed by umbrella companies from being able to claim travel-to-work and subsistence expenses against their taxable income from April next year. Whilst a consultation document has been issued, it seems likely that this change is something the government intends to implement.
Lastly, the Chancellor appears to want to have another go at improving the IR35 legislation and has has asked HMRC to "start a dialogue with business on how to improve the effectiveness of existing IR35 legislation” saying "The government wants to find a
solution that protects the Exchequer and improves fairness in the system”. There is absolutely no indication yet as to what this might mean but apparently HMRC intend to publish a document shortly setting out a framework for those discussions.