The 2016 Budget delivered by George Osborne in March may seem a long time ago but there were several important changes that the former Chancellor of the Exchequer announced that will affect contractors. While it’s easy to forget about tax and political budgets until it’s time to file your tax return, there are often many opportunities for tax planning that will help you maximise your income as a contractor.
Osborne made several important changes that will come into force from April 2017. To recap , public sector bodies will be responsible for deciding if contractors are covered by IR35 or not. Corporation tax is due to fall to 19 per cent next year and the Personal Allowance and other thresholds will rise. Lifetime ISAs will become available for under-40s to create a nest egg. And there will be a new ‘National Living Wage’ for those aged over 25.
So what does this all mean for contractors? Since the April Budget, more detail has emerged about how each of these changes will be implemented so here’s the ContractingWISE guide to what contractors need to know before April 2017.
The amount of money a person can earn before paying Income Tax is rising
There are several threshold increases that will allow contractors to keep more of the money they earn.
The Personal Allowance will rise from £11,000 to £11,500, so you only need to pay tax on earnings above £11,500.
Higher Rate taxpayers will also see a rise in the 40 per cent tax threshold to £43,000 for the 2016/2017 financial year, and it will increase to £45,000 from April 2017.
Dividend tax rules changed from the beginning of April 2016, so all tax returns filed after the end of this financial year will need to reflect the new arrangements. To recap, for any dividend payments over £5,000, tax will be charged at the basic rate of 7.5 percent (up to £32,000), higher rate of 32.5 percent (up to £43,000) and additional rate of 38.1 percent beyond.
Responsibility for deciding on IR35 is changing for the public sector
The rules that govern whether or not a contractor is self-employed or not are known as IR35. HMRC believes being self-employed means that the individual is able to control when, how and where they work, rather than an employee who has fixed hours or can’t go on holiday without permission.
Until now, it’s been up to individuals to decide if IR35 applies to them, but from April 2017, that responsibility will fall on public sector bodies who hire contractors. Nothing has changed for the private sector.
The government has been consulting the public on exactly how the new rules should be implemented, and is considering contractors’ feedback, but it seems likely they will introduce a digital tool, probably a webpage, where contractors and their employers can check their IR35 status. For more details, see our update on the latest proposals.
The introduction of Lifetime ISAs
The new Lifetime ISA is billed as providing younger people an opportunity to save for their first home or towards a pension. You can save up to £4,000 each year, and receive a 25 per cent bonus from the government at the end of the tax year – up to £1,000.
The catch is that you need to be aged 18 to 40, although the scheme will run until you reach 50. So if you were to open a Lifetime ISA on your 18th birthday and keep saving £4,000 a year, you’d get £32,000 from the government.
There’s another catch – if you use the money for anything other than the purchase of a home or a post-60 pension, you lose the bonuses and pay a 5 per cent penalty on the amount you take out .
Meanwhile, the regular ISA limit will also rise to £20,000 so if you fancy investing in shares or can find a cash ISA that pays interest, you can invest more money tax free.
There is a pensions hit however. If your pension pot is worth more than £1million, you’ll pay tax on the contributions – until now people have had an allowance of £1.25million. Remember, it’s a good idea to conduct a regular pension review to ensure you’ll meet your retirement expectations.
There’s a new National Living Wage for over 25’s
The new minimum wage for over 25s is being set at £7.20 per hour, up from £6.70 and is being re-badged as the National Living Wage. This shouldn’t be confused with the amount of money that the Living Wage Foundation believes workers need to live on – that’s £8.25 per hour – but there is a potential impact on contractors with limited companies.
If a contractor becomes an employee of their own company as well as a director, or if they employ someone else – such as a spouse or other relative – then they will potentially need to demonstrate that they have met the NLW requirements. The penalties for not doing so are severe – anyone found guilty of not paying the minimum wage can be disqualified as a company director for 15 years.