As one eventful year comes to a close, we look forward to 2017 and examine how forthcoming legislative changes and economic events are likely to affect contractors.
1. General economic outlook
Most general economic forecasts remain positive – the pound is regaining some of the ground it lost immediately post-Brexit, world stockmarkets have been boosted following the US election, and GDP growth is expected to be positive in 2017 (although it may slow to 1.2% according to PWC).
However, employers hate uncertainty. We have no idea how the economy will react to potentially years of unravelling the UK from the EU, or if the Italian banking system will fail and cause another financial crisis in the Eurozone. So, firms are bound to be more cautious. It remains to be seen how the April 2017 IR35 changes (see below) will impact the hiring intentions of public sector organisations or not.
2. Average rates up year-on-year
According to ITJobsWatch, the median daily contract rate for all key skills has risen over the past year – significantly more than the prevailing rate of inflation. Average rates for developer roles has risen by 3.65% and by 4.65% those working in Agile Software Development. In fact, rates have risen for all of the Top 50 most commonly quoted keywords in contract job ads. You can view the complete table here.
3. IR35 changes for public sector contractors
From April 2017, the IR35 status of contractors working for public sector bodies will now be determined by end-clients. Currently, limited company contractors working in the public sector are responsible for operating IR35 and paying any tax liabilities (if caught) to HMRC. However, responding to apparent ‘abuse’ within the industry, this responsibility will now shift to employers. As a result, keen to avoid the risk of making an incorrect status assessment, clients may prefer to force contractors to operate within IR35 or work via umbrella companies.
Seb Maley from Qdos told us: “Ultimately this could mean a lot less take-home pay for contractors and probably a lot less good contractors in the public sector.”
However, the big question many are asking is: is this public sector change a test-run for the private sector?
Responding to a similar question posted in a recent webinar, IPSE responded: “Almost every independent tax expert – no, in fact, EVERY independent tax expert – we have spoken to believes the Government will look to apply the rules in the private sector in the not too distant future.”
This topic is perhaps the key issue for contracting in 2017.
4. Flat Rate VAT changes
From 1st April 2017, many small business owners will be worse of as a result of changes to the Flat Rate VAT scheme. The FRS was implemented to simplify the VAT calculations of participants by allowing businesses to repay a fixed percentage of turnover each quarter to HMRC rather than working out their exact liabilities each time.
However, HMRC believes some businesses have abused the scheme, particularly those with very limited outgoings (costs).
As a result, if you’re a ‘limited cost trader’ (as per the Government’s definition), your company’s fixed percentage will rise to 16.5%, wiping out any potential tax benefit you may previously have enjoyed. Currently, most contractors on the FRS use a fixed percentage of 14.5%.
Read this article to find out more about this change, including how to work out if your company is affected.
5. Dividend tax hike – time to pay
The big contracting story from 2016 was the dividend tax hike in April. Once again targeting small businesses, HMRC replaced the old system of dividend taxation (using tax credits) and replaced it with a series of fixed dividend tax rates.
A contractor earning the most tax efficient salary for the year (£8,060) and drawing down £80,000 in dividends, will face an additional tax liability of almost £4,400.
Most contractors will already be aware of this tax change. However, the fallout from the dividend tax hike won’t be felt until Self Assessment time in January 2018. This is when those additional dividend tax liabilities for the 2016-17 tax year become payable. And don’t forget those payments on account.
Not only will the contractor in the example above have to pay £4,400 in addition tax by 31st January 2018, but they will also be faced with an extra £4,400 of ‘payments on account’ (half due in January, half in July 2018).
So, if you do face a higher dividend tax liability (as most of us do), you may consider putting some of your hard-earned funds away to meet this future tax bill.
Thanks for making 2016 a great year for our site – with almost 1m visits recorded.
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