Dividends. Umbrella salary sacrifice. Corporation tax. ITContracting.com is told it all may turn ‘unpalatable’ on Oct 30, what with the PM bracing Britain for ‘unpopular decisions’.
* Live Budget 2024 Updates here *
The rundown: Sir Keir Starmer just dropped the biggest clue yet that Autumn Budget 2024 is going to be bruising for contractors.
The detail: In a televised speech, the prime minister said the “budget” on Wednesday October 30 2024 would be “painful”.
Using terms synonymous with the contracting industry, Sir Keir also said: “It won’t be business-as-usual.”
And the PM warned in his speech (Aug 27) that under his direction, chancellor Rachel Reeves “won’t shy away from making unpopular decisions now, if it’s the right thing for the country in the long term.”
Why it matters: Budgets contain reams of proposals by the government of the day, on how taxpayers’ money will be spent.
For IT contracting, the most significant set of rules ever — IR35 — got unveiled at a Budget, as did the seed of the second most significant set, the Off-Payroll Working (OPW) rules.
Both frameworks (introduced on April 6 2000, and April 6 2017 in the public sector and April 6 2021 in the private sector, respectively), can significantly dent contractor take-home pay.
What it means: There is now a worry that a range of taxes and levies payable by contractors to HMRC will be announced for increases on Oct 30.
The thinking is that these tax increases will be announced to help fill what Sir Keir called in his speech a “£22billion black hole in the public finances.”
Expected tax rises at Autumn Budget 2024 for contractors include or relate to:
- Dividend rates, thresholds and allowance (see exclusive comments below)
- Pensions and umbrella company salary sacrifice (see exclusive comments below)
- Corporation tax (see exclusive comments below)
- IHT, CGT, and VAT on school fees (see below)
- Business rates and Employer’s National Insurance (see below)
Graham Jenner of accountants Jenner & Co told us his main “worry” about Autumn Budget 2024 is dividend tax.
“Dividend income is taxed at what officialdom calls ‘dividend tax rates’ and this wording suggests that dividend tax is NOT income tax — but it is,” says Jenner, a chartered accountant.
“Legislation states that income tax is charged at the dividend tax rate — rather than the standard income tax rates.
“Limited company IT contractors must hope that Sir Keir and Reeves don’t make an exception to Labour’s manifesto pledge not to raise income tax, with some clever wording on dividend tax rates. Or [clever wording on] the thresholds, or the [£500] allowance.”
‘Clever wording’
Pressed for that ‘clever wording,’ Jenner obliged, even though fears it might give Reeves ideas for her full Autumn Budget 2024 speech,
The speech usually lasts about an hour from 1230 and is delivered in the House of Commons after Prime Minister’s Questions.
“If they move to hike dividend tax, which is my big fear for limited company IT contractors, expect part of Autumn Budget 2024’s full speech to state something along the lines of:
“‘While we have pledged not to increase income tax, national insurance and VAT, we also want to make the tax system fairer. That is why I can announce today an increase in dividend tax rates, with the aim of bringing rates more closely in line with income tax rates.’”
Chris Bryce, chief executive of the FCSA, told us to watch out for one of three pensions raids by the chancellor on Oct 30.
Usually, the Freelancer & Contractor Services Association is most concerned with the activities of umbrella companies and contractors.
But umbrella company regulation is increasingly looking more like an exercise for HMRC (its latest edition of ‘Spotlight’ fleshes out the previous government’s ‘due diligence’ proposal).
Or if not umbrella regulation will fall to the Fair Work Agency, the rechristened Single Enforcement Body.
‘Tinkering with salary-sacrifice’
Either way, Byrce isn’t taking his eye off umbrellas and he fears that nor might Reeves, to carry out one of the three pensions raids.
“Reeves could look at tinkering with [the] salary-sacrifice regulations [which some umbrella companies are governed by],” Bryce says.
“Or, to achieve the same effect…[the chancellor might consider] re-capping pension contributions. Or remove upper tax rate relief for taxpayers earning over the £50,270 threshold.
“The latter would cause much angst for many contractors currently contributing substantial amounts to their savings for retirement.”
‘Working people’
Bryce believes a revenue-hungry Reeves will have no choice but to raid pensions, because Labour’s vow to freeze income tax, NI and VAT boxes her in.
Sir Keir mentioning twice in his Aug 27 speech the need to support “working people” further curtails and concentrates the chancellor’s offerings.
But Bryce hopes this could be where the chancellor’s few ‘giveth’ rather than ‘taketh’ actions occur on Oct 30.
‘Unfair cliff-edge higher tax rate’
He says: “Fiscal drag has already brought many workers at all skill levels into the 40% tax band, and so Reeves will likely address this unfairness.
“Or [the chancellor will address] the even more unfair cliff-edge higher tax rate for those earning more than £100,000
“In 2024-25, this stands at 45% of all income between £50,271 to £125,140.”
The so-called ‘HRT’ (Higher Rate Threshold) threshold was frozen in March 2021 until 2025-26, by the then-prime minister Rishi Sunak
IFA Angela James says fiscal drag is just one more reason to check before the “unpalatable” Budget that your limited company is using all available tax breaks.
“With just [58] days to go until Autumn Budget 2024, have you reviewed all your options?” asked James, founder of Yolo Wealth.
Further addressing limited company contractors, the independent financial adviser continued:
“When was the last time you actually did some financial planning?
“Remember, tax breaks aren’t just for the rich — opportunities to save tax are available to us all.
“So if you’re building funds for the future, or holding dividends back in your company, or caught up in higher rate taxes through an inside [IR35] contract….make sure you’ve considered, and are making the most of your tax breaks”.
James says such action is all-the-more important given that Sir Keir in his speech “paved” the way for news on Oct 30 that “may not land too well”.
A veteran accountant will soon suggest to ITContracting.com that the first fiscal event from a Labour government in 14 years will be much worse than a ‘not-too-well’ received Budget.
With more than 40 years’ experience advising IT contractors, the accountant will say:
“Corporation tax has seen changes quite recently — on only April 6 2023 with the Small Profits Rate, but hikes could very well be unveiled on Oct 30 2024.
“For contractors, who already view corporation tax as a form of double taxation — bearing in mind they are taxed once on company profits and again when those profits are drawn as income in the shape of a dividend, a corporation tax increase at Autumn Budget 2024 would represent a significant financial hit.”
Rob Moore, an entrepreneur, agrees that there’ll be a financial hit from chancellor Reeves late next month, but says it’ll likely be six-fold.
“I am sure they will fill the ‘blackhole’, with inheritance tax rises, capital gains tax rises, council tax rises, business rates rises, stamp duty rises and of course, VAT on school fees,” said Moore, CEO of Progressive Property.
In response to the entrepreneur, who posted to LinkedIn, an angel investor provocatively claimed that Labour’s core voters can rest easy, however.
‘Generational wealth’
“All the people who voted for Labour [are] the people who will be least impacted financially, by all of these ridiculous changes,” braved the investor, Lauren Lovett, referring to Moore’s six-strong financial hit-list.
“They aren’t aspiring to build generational wealth or invest in their children’s education, or build companies that will hire hundreds of people, bringing new jobs and opportunities to all able workers.
“Their limited view of the world had them take action and vote labour because they couldn’t see any further than the ‘vote for change’ slogan. [So] I’m nervous and worried about the economic future of this country”.
Lovett was attacked on social media for her comments.
But not by everyone.
Business-owner James Sturdy said people running their own enterprise should fear Oct 30, as he rubbished Labour’s pledge to freeze NI, even if it was reportedly renewed only yesterday.
“[Reeves] will increase employer’s national insurance as it isn’t covered by the promise not to increase NI,” claimed Sturdy, a food manufacturing entrepreneur, adding:
“And they will penalise businesses [both] small and large, making it harder to start, grow or sell a business. I hope I am wrong but I don’t foresee a good few years ahead for anybody [running an enterprise].
“However, a good business will outlast any short term [politically-motivated tax announcements].”
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