Some contractors will emerge slightly better off from the Chancellor of the Exchequer’s 2016 Budget – but those who work for public sector clients will need to make sure their tax affairs and contracts are thoroughly in order.
Public sector limited companies now responsible for Contractor’s tax
From April 2017, any public sector body that hires a contractor through their own limited company will become responsible for making sure that those contractors are paying the right amount of tax.
This means public sector organisations like councils, the NHS and the BBC are likely to have to question their contractors’ tax affairs.
So all contractors need to make sure that their contracts are IR35 compliant – something that ContractingWISE can help with.
George Osbourne didn’t mention IR35 directly but his statement did say that “existing legislation on off-payroll working” means that anyone working through a limited company is required to “pay broadly the same taxes as employees” – a layman’s description of the IR35 rules.
He also said he was intending to “consult on a simpler set of tests and online tools” to make it clear just who IR35 applies to. This could easily be a double-edged sword – while clarity over IR35 means contractors are less likely to face investigations, more people could be caught in the IR35 net.
The Chancellor made no mention of two changes he announced in the 2015 budget that promise to have a significant impact on contractors.
Changes to dividend taxes will still come into force on April 6, meaning an effective increase in taxes on dividends of about six percent on the marginal rate.
Personal service companies and umbrella companies also face restrictions on travel and subsistence expenses, if they come under IR35 rules. The government said it was unfair that contractors could effectively claim for travel to and from work, because permanent employees cannot do this. Those outside IR35 are not affected.
The changes mean contractors will need to do some careful tax planning to escape the worst effects. To find out how they will affect you, get in touch with one of our advisors.
Other tax changes
- Entrepreneurs who do occasional jobs will be able to earn up to £1,000 tax free. And people who rent out their driveways or lofts will be able to earn £1,000 before they pay tax on that income.
- Oil and Gas contractors may benefit indirectly from the Chancellor’s decision to cut Petroleum Revenue Tax – a tax on profits from some older oil fields – from 20 percent to 10 percent, although few companies pay the tax at the moment so the impact may be limited.
- Capital Gains Tax paid on investments – but not property – is being cut. From April 2016, the basic rate falls from 18 percent to 10 percent, while the higher rate falls from 28 percent to 20 percent.
- And if you’re under 40, from April 2017 you’ll be able to open a lifetime ISA as a form of pension. If you put in the maximum of £4,000 in a year, the Government will add another £1,000.