This April, a new set of corporate and personal tax bands and allowances will take effect. Following a series of headline-grabbing announcements during Budget 2014, we look at how these changes are likely to affect the typical IT contractor.
One of the main announcements made during Budget 2014 was a significant increase in the Personal Allowance from 6th April 2014 to £10,000. There will be a further increase to £10,500 from April 2015.
To pay for this generosity, the higher rate tax threshold has been increased only marginally – to £41,865 from 6th April, and will rise by another 1% from April 2015.
As a result, more taxpayers than ever will now be paying tax at 40% on a proportion of their income.
You should remember that for every £2 you earn above £100,000, the value of your Personal Allowance is reduced by £1. So, in the 2014/15 tax year, your entire personal allowance will have been eroded if your total income reaches the £120,000 mark.
Income tax and dividend tax rates remain unchanged.
The ‘main rate’ has been steadily falling since the Coalition Government came into power in 2010, when the headline rate stood at 28%. This year, the rate paid by larger firms has fallen to a mere 21%. In April 2015, it will be cut further – to 20%.
Unless your company generates £300,000 or more each year, you won’t be affected by this cut at all. Almost all limited company contractors already pay the ‘small profits’ rate of Corporation Tax, which remains at 20%.
From April 2014, if you’re an employer, you can can offset up to £2,000 of your company’s Employers’ National Insurance costs, thanks to the new Employment Allowance.
If you’re a limited company contractor, you will only benefit if your salary (or total staff salaries) are high enough to incur Employers’ NICs… and most contractors draw down small salaries.
Find out more about this new Allowance in our dedicated guide here.
Pension / ISAs / Premium Bonds
The last Budget freed up the way you can invest in, and draw down your pension. Later in the year, the ISA investment limit will be increased to £15,000. Find out more about these specific measures here.
If you invest in Premium Bonds, the total amount of Bonds you can hold is set to increase from £30,000 to £40,000 this June, and to £50,000 in 2015. The number of £1m prizes will also double.
If you have used a tax avoidance scheme to channel your contract earnings, then the 2014 Budget will probably make sobering reading. The Chancellor has put in place the most comprehensive set of anti-avoidance measures ever seen. Find out more here.