Here are all the main points from Budget 2016, with a focus on changes which affect the contracting industry.
The Chancellor delivered his Budget speech at 12.30 on Wednesday 16th March. The associated documentation (the ‘Red Book’) has also been published (PDF), and contains the real detail.
For contractors, the main points of interest are:
a) From April 2017, public sector organisations and recruiters will be responsible for operating IR35 for limited company contractors. Importantly, however, contractors working in the private sector are excluded. Unusually, a contractor-specific measure was mentioned in the Chancellor’s speech itself. He said:
“Public sector organisations will have a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies.”
Find out more in our dedicated explanation of this measure.
b) The Government has confirmed that Travel & Subsistence expenses are to be restricted for umbrella company workers.
c) The pre-announced dividend tax hike is still set to go ahead from 6th April 2016.
Specific points of interest to contractors
- The Personal Allowance to rise to £11,000 (pre-announced) from April 2016. From April 2017, it will rise to £11,500.
- The higher Rate income tax threshold will rise to £45,000 from April 2017.
- Anti-tax avoidance / evasion measures are expected to raise £12bn by 2020.
- Action to be taken against the use of limited companies by public sector workers (‘personal service companies’). From April 2017, where the public sector engages an off-payroll worker through their own limited company, that body (or recruitment agency) will become responsible for determining the employment status of the worker [1.149]. Importantly, the Government confirmed: ‘The rules will remain unchanged for those working in the private sector’ [2.40].
- The Government will consult stakeholders on creating simpler tests and online tools to help workers determine their employment status [1.150].
- The Capital Gains Tax rates will be cut from 28% and 18% to 20% and 10% (higher rate and basic rate) from April 6th 2016.
- The Budget confirms that the Travel & Subsistence Expenses restrictions will go ahead as planned. This affects contractors working via an intermediary (such as an umbrella company), where they are under the supervision, direction and control (SDC) of the client. Limited company contractors who aren’t caught by IR35 are not affected by this measure. [7.13].
- Action will be taken against large firms who don’t pay sufficient Corporation Tax. The logic is that the Treasury will take from large corporates, and redistribute the proceeds to smaller firms.
- Corporation Tax will be reduced to 17% by April 2020 (it was already due to be cut to 18%).
- From April 2018, Class 2 NICs will be abolished (this will benefit the ‘self employed’, i.e. sole traders and members of partnerships).
- Small Business Rate Relief threshold will rise to £15,000 from April 2017, so no business rates are payable all if the rateable value of your premises/office falls below this threshold.
- The most significant pre-announced change from April 6th is the dividend tax hike which will cost the average contractor thousands more in taxes from next year onwards. Read our dividend tax hike summary, and try our tax hike calculator.
- Directors’ Loans – to deter company owners from using directors’ loans or advances to mitigate against this dividend tax hike, the loans to participators tax rate will also be increased from 25% to 32.5% from 6th April [Section 3.31 of the Red Book].
- As pre-announced, companies where a director is also the sole employee will no longer be able to claim the Employment Allowance. This incentive refunds up to £3,000 in Employers’ NI contributions for eligible businesses, but is of little or no benefit to limited company contractors who remunerate themselves with low salaries – either at or just above the prevailing threshold where Employers’ NICs become payable.
- Economic growth has been revised down since the 2015 Autumn Statement to 2% during the 2015-16 tax year.
- Future growth forecasts have also been revised for the following two tax years to 2.2% (2016-17) and 2.1% (2017-18)
- Public spending to be cut by an extra £3.5bn per year by 2019-20.
- Government expects Treasury to report a Budget surplus by 2019-20.
- ISA limit extended to £20,000 from April 2017.
- New ‘Lifetime ISA’ for under-40s. For every £4 saved, the Government will top-up by £1 (up to £4,000 per year).
- The Pensions Lifetime Allowance will reduce from £1.25 million to £1 million, effective from April 2016 (pre-announced).
- Insurance premium tax to rise by 0.5%.
- Beer and Cider duty frozen.
- Fuel duty to be frozen for a sixth year in a row.
Useful Budget Resources
- HM Treasury Twitter Feed – @hmtreasury
- All the important documents have been posted here
- BBC Budget Live Feed – consistently good, reliable source of information on Budget day.