The Chancellor, Rishi Sunak, presented his third Budget on Wednesday 27th October 2021 – an update of the government’s plan for the economy based on the most recent economic reports from the Office of Budgetary Responsibility and a Budget that will prepare the UK for a post COVID “age of optimism.”
As predicted, he unveiled a number of measures to balance the books after spending billions during the Covid pandemic. Although, you could be forgiven for thinking that the Prime Minister announced the most important tax news of the year on 7th September, with the advanced announcement of the new Health and Social Care levy which commences from 6th April 2022.
For the 2022/23 tax year the levy will be implemented by a simple increase in the rate of Class 1 NIC (including Class 1A and Class 1B paid by employers on employee expenses and benefits) and Class 4 NIC. The increase will be 1.25% for employees, employers and the self-employed, so a total increase of 2.5% in respect of employed workers (split between the employer and employee) and 1.25% for the self-employed. If individuals take their income in the form of dividends from their personal service company, the tax rate on those dividends will also rise by 1.25% from April 2022. Post 6th April 2023, this will be replaced with a new tax – the “Health and Social Care Levy” and will be shown separately on payslips and self-assessment payments. When this takes effect, the 1.25% levy will also apply to those still working above state pension age (who do not pay NIC).
Therefore, employers and small companies will need to factor in the cash flow implications from next year for these increases. However, this is an opportunity for end hirers that already have robust systems in place to manage their off-payroll obligations to achieve future expansion through the use of outside IR35 contractors, to reduce their employer NIC costs.
Pension contributions continue to be an important consideration for contractors as a tax efficient vehicle and could help against the rising NIC costs. Umbrella workers utilising salary sacrifice options will find this particularly beneficial as the deductions are made prior to Employer NI, Employee NI and Tax deductions.
In terms of issues directly impacting the flexible labour market, perhaps unexpectedly, there was no mention of the off-payroll (IR35) reforms in either the Chancellor’s speech or in the detailed Budget documents. This is a clear indication that the Government see this reform as fully implemented and have handed over enforcement of the rules to HMRC. Coupled with HMRC’s “soft landing period” ending in April 2022 and evidence of recent enforcement activity, this should act as a reminder to end hirers and their supply chains that their IR35 solutions should now be in a “business as usual state”.
As the off-payroll reforms bed in we are now seeing the commercial impact on the flexible labour market. An example of this is the IR35 changes being quoted as one of the leading factors behind the shortage of HGV drivers. The resultant economic impact of labour shortages, mismanaged IR35 responses and a resurgence in the flexible labour market is creating a perfect storm.
In our previous Budget output blogs, we emphasised that end hirers and recruitment businesses who fail to manage their obligations could face serious commercial implications, whilst those who continue to support genuinely self-employed contractors will benefit significantly from this change and this continues to be true. Brookson Group, which Intouch Accounting are part of, has helped hundreds of private sector end hirers and thousands of recruitment agencies to navigate these changes through audits of their workforce, support in continuing to take reasonable care in respect of IR35 and managing supply chain compliance. This work continues as these services will enable business as usual in the flexible workforce.
Clarity in respect to IR35 determinations and working options is crucial for contractors too. Flexibility is now needed in the way contractors operate and seeking the support of one trusted partner to help manage inside and outside assignments will prove indispensable going forward.
Intouch customers are now benefitting from our unique service called Flex. Flex allows contractors to switch between limited and umbrella working with a wrap-around of specialist accountancy, tax advisory, legal and financial services tailored to their circumstances.