Looking at the summer 2015 budget overall, provided a mixture of news for contractors and freelancers.
Firstly, the good points:
- A reduction in Corporation Tax to 19 per cent in 2017 and then 18 per cent by 2020
- A planned increase in the personal allowance to £11,000
- The change in the threshold for higher rate tax, due to increase to £43,000 in April 2016
- A freeze on fuel duty is will be welcomed by most tax payers, not only those who work for themselves.
- The government will scrap self-assessment tax returns, replacing them with online tax accounts in order to reduce the tax administration for 12m people in the UK. The chancellor said: “Millions of individuals will have the information the Revenue needs automatically uploaded into new digital tax accounts.
- A new personal savings allowance will be introduced, allowing up to £1000 tax free savings. Additionally, the government will be introducing a more flexible ISA which won’t penalise savers for withdrawing and replacing funds during the year.
- Class 2 National Insurance contributions for the self-employed to be abolished, in a move to support 5m people by simplifying tax administration.
However, a change to dividend tax is specifically targeted at those who work for themselves:
- The existing dividend credit will be scrapped and new rates being introduced from April 2016. These will be 7.5 per cent for basic rate taxpayers, 32.5 per cent for those who pay tax at the higher rate and 38.1 per cent for additional rate taxpayers.
- There will be a new £5,000 Dividend Allowance, which will be tax-free, which is intended to replace the existing dividend tax credit.
- Directors who are the sole employee of their own limited company, will no longer be able to claim the £2,000 NIC Employment Allowance. However, for companies with more than one employee, the Employment Allowance will rise to £3,000 from April 2016.
- There will be a consultation on the way umbrella company contractors claim expenses, suggesting that tax relief on expenses, specifically travel and subsistence, claimed by those who work through personal service companies is likely to be restricted. How this will work in practice however, remains to be seen.
- Tax relief on lifetime pension pots will fall from £1.25m to £1m.
- Once again, there is also a planned review of IR35, which the Treasury is expecting to raise an additional £400 million from the planned enhancements.
The Budget 2015 has introduced a couple of changes to Entrepreneur’s Relief (ER), but neither will have a major impact on contractors using ER as a strategy to extract cash tax efficiently from their limited company.
The government has removed the 10% tax rate on capital gains when personally owned assets are used as part of the business. However this will affect very few contractors as contracting businesses tend not to be capital intensive and those assets that are used tend to be inside the company.
The other new measure relates to ownership rules that will prevent a taxpayer benefiting from ER by using the strategy of assigning their small ownership in the trading company to a company where they own 100% of the shares. Again, this change will not affect contractors, and is largely gained at management teams collectively investing in small start-ups.
Overall then, whilst the budget contained mixed messages for those working for themselves, it still remains the case, that contracting through your own limited company, with the correct planning, is far more tax efficient than operating paye or via an umbrella company.