Summer Budget 2015

PSCs have taken a hit this summer with the Conservative’s first full Budget announcement in 19 years. A number of changes have been made which particularly affect one man band contractors and not much for the better.

Dividends

With the current system, basic rate taxpayers (those with taxable income up to £31,785) incur a 10% tax on dividends. However, there is also a 10% tax credit to account for tax already paid on profits through Corporation Tax, making dividends a tax efficient manner of drawing income from a company.

Osborne has changed this as of April 2016 by replacing the 10% dividend tax credit with a tax free dividend allowance of £5,000 per year for all taxpayers. There will then be new tax rates on dividend income above the allowance:

• 7.5% for basic rate taxpayers (currently 0% including tax credit);
• 32.5% for higher rate taxpayers (currently 25% including tax credit);
• 38.1% for additional rate taxpayers (currently 30.56% including tax credit).

This means that if you are a basic rate taxpayer, you will now have to pay 7.5% tax on dividends between £5000 and £32000 (the 2016/17 basic tax rate allowance), where this was previously nil.

It seems that the government is actively trying to dissuade workers from operating with low salary and high dividends, pushing contractors into employment. Many have seen this as an attack on the PSC and even entrepreneurship itself. Operating via a limited company will still remain a more tax efficient manner of operating, but the gap has certainly shrunk.

Travel & Subsistence

Another big hit for PSCs is the restriction of tax relief for those operating via an intermediary, whether this is a limited company or umbrella.

From April 2016, contractors will be denied expense claims for travel and subsistence if supplying personal service and under the right of supervision, direction or control of any person.

These are two of the most important IR35 status tests which are not new to contractors, however this change seems to further penalise PSCs.

National Insurance

From April 2016, the NIC Employment Allowance will increase from £2000 to £3000, which all sounds like good news, except that a second change from April will be that those companies where the director is the sole employee, will not be able to claim the allowance at all, targeting PSCs further still.

Good News

Although the Summer Budget 2015 has hit hard on contractors, there was a few bits of good news which are worth dwelling on, if only for a little pick-me-up:

• Corporation Tax will be reduced to 19% in 2017 and 18% in 2020.
• Personal allowance will be increased to £12,500 by the end of this parliament, increasing to £11,000 in April 2016 and then to £11,200 in April 2017.
• The higher rate tax threshold will increase to £43000 in April 2016 and to £43600 in April 2017.
• The OTS will be made a permanent office to review the taxation of small companies.
• Improved inheritance tax from April 2017.
• Plans for legislation which will cap income tax, VAT and Class 1 NIC rates.

Summary

All in all, the Summer Budget 2015 has given a dismal outlook for contractors. A discussion document has also been published specifically surrounding the IR35 legislation which we will deliberate in a separate article.
Despite the seeming attack on contractors this summer, operating via a limited company will still remain the most tax efficient manner of operating.