July 2015 Budget
Yesterday Chancellor George Osborne presented his first Tory Budget to the House of Commons.
He optimistically presented it as a “Budget for working people” that creates a “sensible path for the benefit of the whole of the United Kingdom”. He reported that the British economy is fundamentally stronger today than it was five years ago and that it is growing faster than any other major advanced economy. Osborne is confident his plans will boldly back the aspirations of working people and suit a country with big ambitions.
We’ve unpicked exactly what this means for contractors – it’s immediately clear how some of the pledges will impact this community. With others, the coming months will reveal more and we’ll be keeping a keen eye on the proposed changes and what they mean for you. We’re involved in the conversations right at the top level and will continue to actively and aggressively champion contractors’ cause. We’re here to speak up on your behalf against the unfair and inappropriate suggestions put forward by government and remain an active part of the consultation discussions.
What is clear from yesterday is that changes are afoot for the contracting community and while Umbrella companies and workers will suffer the most (and soon), Limited Company contractors continue to have more opportunities to get the most out of contracting. And those who engage the services of an expert contractor accountant will certainly benefit more than those who rely on accountancy software alone to get them through. After all, keeping tidy records is one thing; having the know-how to make sure you’re getting the most while remaining compliant is quite another.
We’ve picked out the Budget announcements that contractors will be most interested in:
- In the March Budget no mention was made of IR35. Three months on Osborne clearly stated that consultations will take place soon to deal with the increasing abuse of the rules around disguised employment when working through a personal service company. On the face of it, this shouldn’t affect most contractors operating legitimately as long as you are able to demonstrate you aren’t operating as a disguised employee. But it will be more important than ever that you get every contract you undertake assessed for the level of risk you face under IR35. We’ll be part of the discussions and have already been invited by HMRC to take part in the consultation. We’ll be there to represent the interests of contractors.
- The lifetime of the Office of Tax Simplification (OTS) has been extended. Earlier in the year it wasn’t clear if it would survive beyond the election but now its role has been extended and it will be looking at small company tax matters. This will include personal service companies.
- The permanent non-dom tax status will be abolished and by April 2017 those who previously positioned themselves as such will pay the same taxes as everyone else.
- Dividend tax credits will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. After this amount, tax rates on dividend income will increase incrementally. Put simply, those who have a modest income (i.e £5,000 or less) from dividends will see either a tax cut or no change in the amount they owe; those with significant dividend income will pay more tax. It’s likely many contractors will need to reconsider the split between what they take as salary and what they take as dividends.
- A consultation document has been issued following the March Budget’s limitations to Umbrella workers’ travel and subsistence (T&S) claims. Following our earlier involvement in the debate, Intouch has been invited to further round table discussions on T&S and we will be making sure that the contractor voice on this subject is heard loud and clear!
- Employment Allowance has been removed for companies where the director is the sole employee. At this stage it is unclear if this will apply for companies which have a spouse second employee and we await further clarity on this.
- The National Living Wage will increase to £7.20 an hour for over 25s in April 2016. This will rise to over £9 an hour by 2020. Any change may well affect spouse wages that are paid.
- Tax relief for buy to let landlords will be restricted to 20% for all individuals by April 2020. In addition ‘wear and tear allowance’ will be replaced by a system that only applies if the landlord actually replaces furnishings.
The additional pledge by Osborne to increase HMRC resources to make sure people pay the tax they owe may set alarm bells ringing for some but knowing what you can do and remaining compliant doesn’t need to be a headache for you if you have the services of a reputable contractor accountant at your fingertips.
- Forecast for jobs growth, created by businesses with the confidence to invest, to grow and to hire. This could be the boost contractors want to hear as businesses launch projects they may have been holding off on while they awaited Budget news.
- The tax free Personal Allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016. The longer-term plan is to increase this to £12,500 by 2020 but we hope to see this come into effect sooner.
- The 40% higher rate income tax threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
- Corporation Tax will be cut to 19% in 2017 and 18% in 2020.
- Inheritance tax is set to change and from 2017 the Government will phase in a new £175,000 allowance for your home when you leave it to your children or grandchildren. This is in addition to the existing £325,000 threshold which will be fixed until the end of 2020-21.
- Both allowances can be transferred to your spouse or partner.
- Those who choose to downsize will not lose any of the allowance from the property they used to own.
- In some cases you will be able to pass up to £1 million on to your children free of inheritance tax.
- Subject to relief will be tapered away for estates worth more than £2 million.
- Free childcare for working families with three and four year olds will double from September 2017, from 15 to 30 hours. This should have a significant impact for all contractors with children, in particular single parent families and mums planning to return to work. In addition the childcare voucher scheme continues until early 2017 when the new tax free childcare is introduced.
Tips to help you manage outcomes from today’s Budget:
- The ongoing T&S consultation suggests that all PSC contractors look at their working practices and contracts to determine how HMRC’s proposed plans might affect them. Do this before the final legislation comes into play in April 2016 if you want to protect your expense claims for travel and subsistence.
- If you are working through an Umbrella company then now is the time to think about the future. With most of your expense claims becoming ignored or taxable and the threat to your mileage claims following the T&S consultation you may find your income dropping off quickly after April 2016.
- If you’re not already using a specialist contractor accountant, consider engaging one sooner rather than later. They are best placed to understand the implications of the Budget and the options available to you. If they deal with the sector every day they should know the pitfalls and opportunities, so take advantage of their experience and expertise.
- The Budget has made it clear that scrutiny on IR35 has shot up Government’s agenda so it makes sense to opt for an accountant who can support you with IR35, including assessing the risks.
- Look at the service you are receiving – if it’s software-heavy but light on personal advice you are likely to be missing out on opportunities. Consider if you are making the most out of contracting and fully mitigating the risks. And most importantly, that you are only paying the right amount of tax!
- Change accountant – if you’re not happy with the service you are receiving from your current supplier, don’t put up with second best. You need to be able to rely on your accountant and there’s no room for complacency.
If you’ve been trying to manage your accounts by yourself or use the services of a software company without the personal service, it’s wise to engage a reputable accountant who can help you navigate through the changes. If you already have an accountant but don’t think you’re getting the service you deserve, talk to us about switching to Intouch. With the right advice you can make the most and mitigate the challenges.
The qualified experts at Intouch work with contractors every day and keep on top of changes that will affect you. We charged a fixed all inclusive fee of £92 + VAT a month and this covers everything you need to run your company smoothly and ensure you remain compliant.
For further information, download our July 2015 Budget summary.
If you are already an Intouch client and have questions about what the Budget means for you, please contact your personal accountant directly.
If you are not an Intouch client, contact us today to talk about how we can help you get the most from contracting.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.