On Wednesday, the 2016 Budget was presented to MPs in the House of Commons. This year’s Budget has reiterated the government’s intention to clamp down on those they perceive to be avoiding taxes. We are yet to receive definitive information on many of the topics relating to contractors and the self-employed; however, the imminent release of the Finance Bill is expected to contain further information on these legislative changes. We will keep you updated as soon as we know more.
Here is a collection of some key announcements that are likely to affect you as a contractor and self-employed freelancer:
- Personal Service Company’s (PSC) have recently come under scrutiny by the government, as they continue to clamp down on those they perceive as avoiding tax. HMRC have said they will “introduce clear, objective tests for employers” to ensure they are following this new legislation.
- HMRC state that from “April 2017, individuals working through their own company in the public sector will no longer be responsible for deciding whether the intermediaries legislation applies, and then paying the relevant tax and NICs. This responsibility will instead move to the public sector employer, agency, or third party that pays the workers intermediary.”
- Travel and Subsistence will no longer be claimable for temporary workers operating through an umbrella company (or other similar intermediaries), if they are subject to Supervision, Direction or Control (SDC). This will also apply to those who operate through a PSC and fall under IR35. This rule will come into effect from 6 April 2016 and was reiterated in this year’s Budget. It had been previously referenced in last year’s Autumn Statement.
- Whilst unpopular, the new dividend tax rate that was announced last year is to go ahead. The annual dividend allowance is £5,000. For dividends that fall outside of this, there will be a higher rate of tax. For the basic rate tax payer, this rate will be 7.5%. For higher rate tax payers, the rate will be 32.5%. And finally, additional rate tax payers will have the rate of 38.1%.
- The government will increase the loans to participators tax rate from 25% to 32.5%, keeping it aligned with the higher rate of tax charged on dividend income. The new rate will apply to loans made or benefits conferred by close companies on or after 6 April 2016.
- Capital Gains Tax will be cut from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers. However, capital gains made from residential properties will not be benefited, as there will be an 8% surcharge.
- To prevent opportunities for businesses to convert income into capital, and achieve a tax advantage, the government will amend the Transactions in Securities rules, and introduce a Targeted Anti-Avoidance Rule.
- Corporation tax, which is currently at 20%, will be decreased to 17% by 2020.
- For those in full time employment, the personal tax-free lower threshold will increase to £11,500 in April 2017 (from £11,000 in April 2016). The higher threshold has also increased to £45,000 by April 2017.
- Self-employed workers will no longer pay Class 2 NICs, starting in 2018. It is estimated that over three million pay this at £2.80 per week. This amount goes towards state pensions and other benefits.
- National Insurance Employment Allowance is to be increased from £2,000 to £3,000 after April, but removed from companies where the director is the sole employee.
- As previously mentioned by the government, the 3% stamp duty surcharge on buy-to-let second properties is to go ahead in April.
- There has been a change in stamp duty on commercial properties. A 0% rate will apply on property up to £150,000. On properties more than £150,000, there will be a 2% rate on the next £100,000, and 5% on properties over £250,000.
- Amendments to finance costs restriction for landlords i.e. mortgage interest restrictions for buy-to-let – as announced in the Summer Budget 2015, relief for finance costs on residential properties will be restricted to the basic rate of income tax by 2020, gradually introduced from 6 April 2017.
- Reform of the wear and tear allowance – As announced in the Summer Budget 2015, from April 2016 the government will replace the Wear and Tear Allowance with a new relief that allows residential landlords to deduct the actual costs of replacing furnishings.
- Lifetime ISA – This new initiative for adults under 40, launched in April 2017, means savers will get a 25% bonus from the government. They can pay up to £4,000 a year, with the annual bonus of up to £1,000 paid until the age of 50. Lifetime ISA accounts can also be used to buy a home or a pension.
Here are a few other changes:
- Duty on beer, cider and spirits has been frozen. However, other alcoholic beverages will be subject to the rate of inflation.
- A new Sugar Tax is to be introduced in April 2018 that will see the tax rate on highly sugary beverages increased.
- Exciting transport links that include Crossrail 2 and the HS3 line between Manchester and Leeds, have been given the go ahead.
As soon as the government release further information on the legislation changes that will affect contractors and the self-employed, we will keep you updated.
If there is anything you would like to discuss regarding this year’s budget, please give our expert team a call on 020 7078 0211. Alternatively, you can contact us here.