What changes will affect contractors in April 2017?
There will be a number of things changing this April, some of which will affect them negatively.
We assess the changes and suggest some tax-efficient ways for contractors to respond.
Public sector IR35 changes
Some of the most seismic changes for contractors will affect those who are working through an intermediary in the public sector.
Thousands of contractors will no longer be responsible for determining their own IR35 status and could face take home income cuts of 20%.
Instead of the contractors judging their own IR35 status, that responsibility will fall on the public sector engager. This can be the public body end-user or a recruitment agency.
Many public sector organisations have already banned contractors working through their own limited companies, known as personal service companies (PSCs).
Some contractors are being encouraged to join umbrella schemes as a way of holding on to some benefits as their take home pay reduces.
Flat rate VAT changes
From 1 April, certain ‘low cost’ contractors and traders will lose some of the benefits of the flat rate VAT scheme.
Announced in the last Autumn Statement, the policy change will affect ‘limited cost traders’ who spend little on inputs like raw materials and stock.
A typical service providing contractor is likely to be affected by the change.
A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
This figure cannot include capital goods (equipment), food and drink or vehicles.
Before the change, a contractor’s flat rate was decided based on the industry they operated in. A full list of the rates is available here.
For ‘limited cost’ traders, the flat rate will now increase to 16.5%.
The VAT flat rate changes will only apply to contractors operating through limited companies who use the flat rate scheme.
Corporation tax to decrease by 1%
Corporation tax will decrease again this year from 20% to 19%. Eventually, the corporation tax rate will drop to 17% in 2020 as a way of attracting inward investment into the country.
The benefits of a corporation tax cut to limited company contractors, however, may be outweighed by other tax changes like a smaller tax-free dividend allowance.
Smaller tax free dividend allowance
A cut to the tax-free dividend allowance from £5,000 to £2,000 means that limited company contractors who pay themselves using dividends will see their take home pay reduced.
Contractors whose dividends are covered by the basic rate will be £225 a year worse-off, while contractors on the higher and additional rates will be £975 and £1,143 worse off respectively.
Again, this change reduces the advantages of operating as a limited company contractor. It may be worthwhile for limited company contractors to seek advice on their most efficient system of operating.
For more information and advice, contact a member of the Umbrella.co.uk accounts team today. Call: 0800 121 6513.