By Jonathan London on 9th July 2015

Summer Budget 2015 – A Contractor & Small Business Review

In a Budget which claimed to support the UK’s ‘working people’, those of you choosing to operate via a personal service company may be feeling a little raw this morning as a result of the Chancellor’s first Budget speech under a Conservative majority.

Whilst there were a number of positives to take out of the longer than normal speech from George Osborne, contractors and freelancers are unfortunately likely to feel the impact more than most when the plans come into fruition from April 2016.

How are you impacted?

Changes to Dividend Tax

The first salvo in George Osborne’s attack on micro businesses came in the reforms to be made to Dividend Tax, impacting those who pay themselves largely in dividends.  These new rules have been implemented to equalise the benefit of taking dividends over salary, which have been offset by the lowering of Corporation Tax Rates (more on this below).

The Dividend Tax credit will be replaced with a new tax-free allowance of £5,000 per year (although how this will work is not yet clear), with subsequent tax rates being increased as shown in this table:

Income tax banding            New rate           Existing rate

Basic rate                                   7.5%                    0%

Higher rate                              32.5%                  25%

Additional rate                       38.1%                   30.56%

These new rates will be introduced from April 2016, and whilst this is essentially is a new tax increase, it doesn’t totally negate the benefit of withdrawing funds via dividends from your business.

Another IR35 Review

Recent reports from the Office of Tax Simplification and the House of Lords confirmed that IR35 is no longer fit for purpose, and as a result, the Chancellor has indicated that IR35 will again be reviewed with the following statement from the Treasury as part of the Budget report:

The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015.…

Travel & Subsistence Expenses

In the March 2015 Budget, George Osborne announced plans to ban tax relief on travel and subsistence expenses for those contractors who are ‘supervised, directed and controlled’.

These plans may come into effect from April 2016, with a consultation document issued, which will impact both umbrella workers, and those PSC directors impacted by SDC.

NICs Employment Allowance

The final raid on the freelance workforce comes in the scrapping of the £2,000 National Insurance Allowance for those who are the sole director of their Limited Company.

However, the NI Employment allowance will actually rise to £3,000 for all other small businesses.  What is not yet clear is whether PSC’s who employ a spouse can claim the allowance.

The good bits

Despite the hammering taken by PSC owners, the Chancellor did introduce a number of incentives to reduce the pain slightly.

  • The increased tax burden as a result of the dividend changes will be offset slightly with a reduction in Corporation Tax rates, which will drop to 19% in 2017 and to 18% in 2020.
  • The personal tax allowance is also being increased, rising to £11,000 from April 2016, with the higher tax band increasing to £43,000.
  • The Government will consult on the scrapping of Class 2 NICs and reforming Class 4 NI later this year.
  • Fuel Duty will be frozen for the rest of 2015.

More Information

We’ve produced our usual full budget summary and tax cards which you can download by clicking the PDFs below.  If you have any concerns around the budget, please contact your accountant.

Summer 2015 Budget Report PDF Download

2016 Tax Rates Download

Jonathan London Written by Jonathan London

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