Following the Government’s unprecedented intervention to counter the energy crisis which has significantly impacted both consumers and businesses, the new Chancellor, Kwasi Kwarteng’s Mini-Budget today has heralded a major change in direction for the government by announcing a wave of tax cuts to drive growth for business and putting more cash in the pockets of the tax-payer in the midst of a cost of living crisis. The scale of the tax cuts has been exceptional and the biggest the UK has seen for half a century.
The government’s announcement to repeal the 2017 and 2021 IR35 changes comes as a surprise to all in the flexible workforce sector. From April 2023, this will return responsibility for IR35 compliance back to contractors and freelancers themselves.
The U-turn will be welcomed by end hirers, agencies and contractors alike. It removes the burden of compliance risk from hiring businesses which should help to unlock the potential of flexible workforces at a time of increasing demand for highly skilled temporary workers.
Whilst this is a welcome move for the sector, it is important to note that from 6 April 2023, it will become the contractors (providing their services via a PSC – Personal Service Company) who will once again be responsible for determining their own employment status and paying the appropriate amount of tax.
What measures will benefit small companies?
- The planned increase on the basic rate of corporation tax from 19% to 25% from April 2023 has been reversed. For small companies, where profits would have exceeded £50,000 next year, a marginal rate would have applied which would have effectively charged a rate in excess of 19%. This has now been cancelled and corporation tax rates remain at 19%;
- Dividend tax rates to fall back to pre-5th April 2022 levels from 6th April 2023.
What about employees – in particular Umbrella employees?
- The Health and Social Care Levy has now been cancelled and from November 2022, the National Insurance rates will fall back to pre-5th April 2022 levels to 13.8% and 12% for Employers NI and Employees NI respectively;
- A reduction in basic rate tax to 19% from 20% from April 2023;
- Abolition of the additional 45% rate of tax meaning the highest rate of UK income tax will be 40% from April 2023.
The Brookson Group’s view
Brookson, of which Intouch Accounting are a part of warmly welcomes the government’s plan to relieve business of red tape by repealing the off-payroll rules which will now require contractors to consider their own self-employment status, moving away from the current requirement of clients to perform this role.
We expect that operating via a PSC will now become more attractive to contractors, however, we should emphasis that this decision will need to be made in light of the IR35 determination for each assignment. Keeping corporation tax at current levels and the reduction in dividend tax next year also encourages operating via a PSC and operating a tax efficiency strategy working via your company if you are not IR35 captured could elicit tax savings.
Tax and National Insurance cuts will be beneficial for umbrella employees leaving them with more net take home pay. Umbrella employees looking to pay into a pension scheme will continue to benefit from considerable tax savings by making contributions into a pension salary sacrifice scheme. Umbrella employees considering switching to a PSC should ensure they take appropriate advice from an IR35 specialist before proceeding.
Whilst agencies and end clients may today breathe a sigh of relief, in the long term, it now benefits everyone to ensure compliance with the off-payroll rules. The reason that these changes were introduced in 2017 and 2021 was due to HMRC’s view that there was widescale non-compliance with the rules in the contractor market. If there is a return to high levels of abuse of the system, there is always a risk that the changes may be reintroduced by a future government. When it comes to talent attraction, hirers and agencies who manage contractor payroll smoothly and support contractors with employment tax status determinations for projects are likely to be valued in this competitive job market.
In the meantime, it is important to remember that the changes will not happen until April 2023, so agencies and end hirers must continue to ensure that their businesses and suppliers are compliant now, in line with the current IR35 rules that are being enforced until then.