Contractors stung by Summer Budget 2015

Chancellor, George Osborne has targeted contractors’ income in yesterday’s Summer Budget 2015.

The dividend tax credit will be replaced, in April 2016, with a new tax-free allowance of £5,000; changing the landscape for those who pay themselves in dividends.

Although the Treasury says this will ensure that ‘ordinary investors with smaller portfolios and modest dividend income’ see no change in their tax liability, the rates are being hiked.

Presently, dividends paid to basic-rate taxpayers are regarded as taxed already within the corporate tax system, so there is no additional tax to pay. But under the new rules only the first £5,000 a year of dividend income will remain exempt.

For dividend income above this tax-free allowance, basic-rate taxpayers will pay 7.5 per cent, while higher-rate taxpayers will be required to pay 32.5 per cent tax.

Those who pay the additional rate of 45 per cent will face 38.1 per cent of tax.

According to the Chancellor: “Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax; 85 per cent of those who receive dividends will see no change or be better off.”

The cull of the dividend tax credit was just one of four key issues that will affect UK contractors going forward. The second of which was a move to prevent sole employees of their own limited companies from claiming the NICs Employment Allowance.

Previously, contractors could offset the £2,000 allowance against employers’ NIC arising on ordinary salary.

From April 2016, contractors who pay themselves any salary will no longer be entitled to claim the Employment Allowance.

Furthermore, the Chancellor is proceeding with plans to ban tax relief on travel and subsistence expenses; most notably for those contractors who are ‘supervised, directed and controlled’.

Finally, in a bid to wrong-foot and frustrate contractors’ advisers, the Chancellor confirmed that IR35 will, once again, be reviewed.

Some contractors will hope the envisioned “reform” to IR35 could be an opportunity to clarify the legislation – as many advisers will hope – but the government’s wording suggests otherwise:

“As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough … the Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation,” the Treasury said.

Any freelancers and contractors wanting clarification or guidance on their financial position can arrange a free initial consultation with their local TaxAssist Accountant by completing our online enquiry form or calling 0800 0523 555.

Last updated: 9th July 2015