Summer Budget - what it means for Limited freelancers & contractors

If the Chancellor George Osbourne wanted us to pay attention to his proposed summer budget then he certainly got the desired effect! 

There is a lot for us all to take in and on the face of it the cost of extracting income from a company has increased but there are still some really good reasons to operate through a Limited company.

Four key areas will affect contractors in the future:

Tax on dividends

From April 2016, dividends will no longer attract a notional tax credit of 10%, which means you can actually take more funds from your company. The way those dividends are taxed will change.

The first £5,000 of dividends will be tax free with further dividends in the basic rate tax bracket attracting 7.5% tax and then 32.5% as a higher rate tax payer. For those tax payers who withdraw over £150,000 of income from their companies the dividend tax rate will be 38.1%.

The increase in personal tax on dividends will be offset by a reduction in Corporation tax rates – 19% from 2017 and 18% from 2020.

Despite the increase in tax liabilities on dividends, operating through a Limited company still remains an attractive option. Dividends will be still be taxed at rates below those applied to other forms of income and do not attract national insurance contributions. The ability to consider long term tax planning strategies remain. Pension planning and contributions should form a key part of any tax planning strategy and there remain attractive tax planning opportunities over the long term if funds are retained until the closure of a company when Entrepreneurs relief can be applied.

Operating a limited company is often a lifestyle choice and an aspiration. Contracting in this manner allows for a work life balance many employees cannot achieve and provides an opportunity to gain experience through contracts in a variety on environments. Many choose to run their own companies as they enjoy the challenge and variety of short term contracts in many locations. 

Running a Limited company provides you with some protection in terms of limited liability and allows you to separate your personal assets from those of the company’s. 

Employers allowance for NIC

Currently an allowance of £2,000 is available against Employers National Insurance Contributions. This is increasing to £3,000 from April 2016 for all companies with more than one employee on the payroll. For sole director companies the allowance will no longer be available. Since many contractors pay a salary at rates that do not attract Employers NIC this will have minimal effect

Travel & subsistence expenses

The Government confirmed their intention to review Travel & Subsistence expenses. They issued a consultation document outlining proposals to remove the tax relief on home to work travel for those employed through an Umbrella company or Personal Service company where the worker is deemed to be under “supervision, direction and control of the end user”.

Contractors working through their own limited companies outside of IR35 should have nothing to fear from these recommendations. Orange Genie will continue to contribute to this consultation as we have done to date to ensure that the views of the temporary work force are fully heard in any decision making process

IR35

Every budget brings with it a promise of a review of IR35 and yesterdays was no different. The Government have again said that they want to make sure the IR35 rules are more “effective” in tackling disguised employment. We don’t know the Government’s thoughts at this stage but Orange Genie were contacted yesterday by HMRC to ask us to take part in the review and we will ensure we take part so that we can represent all Limited company contractors.

Yesterday's budget may have delivered some headline changes that appear to be bad news, but the long term result may well be greater clarity, more focus on compliance and the reduction of non compliant models.

As a member of FCSA, Orange Genie Accountancy has always advocated the importance of compliance and the need for transparency. For us whilst the devil will be in the detail that has yet to be published, it is business as usual.

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