Emergency Budget and it's effect on Contractors working through an Umbrella Company

23 June 2010

As with most budgets there is good and bad news! Here we look at the changes that are most likely to effect people contracting in the UK.

1) Income tax

Personal allowance has been increased from £6,475 to £7,475 with effect from 6 April 2011. To ensure higher rate tax payers don't benefit from these changes the basic rate limit for tax is reduced by £2,500.

The Chancellor will eventually raise the personal allowance to £10,000.

2) National Insurance rates

The rate of employee and employer contributions will rise by 1% with effect from 6 April 2011. This is partly offset by the fact that the threshold at which employers will start to pay National Insurance Contributions will increase by £21 to £131 per week with effect from 6 April 2011.

3) Capital Gains Tax

The capital gains tax rate on non business assets will remain at 18% for basic rate taxpayers and increase to 28% for higher rate taxpayers. These changes are now in effect. The annual allowance will remain at £10,100 this year and increase in line with inflation thereafter.

4) Pensions

Pension relief for higher earners was due to be phased out for higher earners.

The Chancellor announced the intention to increase the state pension age to 66.

5) VAT

The standard rate of VAT has been raised to 20% with effect from 4 January 2011. Zero rated and exempt items will not be impacted.

This will mostly affect contractors who are working for end clients that are partially exempt (i.e. banking/financial services or medical sector) and hence unable to reclaim back all the VAT. The effect of this will mean contractors in these sectors are more "expensive" and could therefore be expected to lower their charge-out rates to offset this.

6) PAYE Review

The Government wishes to explore how the PAYE system could be improved in order to reduce costs and make the system easier for employers and HMRC to administer.