Chancellor of the Exchequer Philip Hammond delivered his Budget on 29th October 2018. To save you leafing through the 120+ pages to dig out the announcements affecting you, here are the main takeaways for the UK’s freelancers, contractors, and small business owners.
The Chancellor repeatedly mentioned that this Budget would be for hard-working families and that the government’s priority was real rising wages, driving growth, and increasing employment.
He also claimed that the ‘age of austerity’ was ‘coming to an end’ with additional funding for the NHS being confirmed. Of course, a ‘no-deal’ Brexit may mean another budget in the Spring.
Possibly the most debated measure contained in the budget for our freelancer and contractor clients. IR35 is a tax legislation designed to combat tax avoidance by workers supplying their services to clients via a third party (such as a limited company); but who in reality, are performing services in the same way as an employee. If you are classified as an employee, you pay more employment taxes.
To help clamp down on this activity, HMRC introduced changes to IR35 in the public sector in April 2017. The changes shifted the responsibility in making IR35 status assessments from the limited company (i.e. the worker) to the agency and the end client. However, after some difficult legal cases and issues with the HMRC online tool available for checking employment status, the government has decided to proceed with caution.
Proposed changes to IR35 in the private sector are:
Businesses will be responsible for assessing an individual’s employment status.
The reform won’t apply to the smallest 1.5 million businesses, and the large and medium businesses to which it will apply will be given longer to adjust, with the changes being introduced in April 2020.
From 6th April 2020, medium and large businesses will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own company.
Where it’s determined that the rules do apply, the business, agency or third party that pays the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.
HMRC won’t carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.
HMRC continues to work with stakeholders to identify improvements to checking employment status for tax and issuing wider guidance to ensure the reform meets the needs of the private sector. Enhancements will be tested with stakeholders, and operational and legal experts before implementation.
A further consultation on the detailed operation of the reform will be published in the coming months, and will inform the draft Finance Bill legislation that is expected to be published in summer 2019.
Our expert chartered accountants will join host Ben Schaefer to present a webinar and Q&A on 6th November at 11am, so if you’re stumped by these changes and need your questions answered, we’d recommend signing up to watch the webinar.
Personal Tax Rates, Thresholds, and Allowances
Personal Allowance and Higher Rate Tax Threshold increase
The rate at which people will start paying Income Tax will rise from £11,850 to £12,500 in April next year. The changes are introduced a year earlier than anticipated.
Equally the higher rate Income Tax threshold will rise from £46,350 to £50,000 in April next year.
The tax-free dividend allowance is unchanged at £2,000.
There are no changes in the scope of National Insurance or the rates paid. However, we expect this to be revisited in future budgets.
Pensions and savings
Amounts from 2019/20 are:
Lifetime allowance for pensions:
The lifetime allowance for pension savings increases in line with CPI for 2019/20, rising to £1,055,000 (2018/19: £1,030,000).
Starting rate for savings:
Unchanged. The band of savings income that is subject to the 0% starting rate will be kept at its current level of £5,000 for 2019/20.
Individual Savings Account (ISA):
The adult ISA annual subscription limit for 2019/20 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs for 2019/20 will be updated in line with CPI to £4,368 (2018/19: £4,260).
Child trust funds:
The government will publish a consultation in 2019 on draft regulations for maturing child trust fund accounts. The annual subscription limit for child trust funds for 2019/20 will be updated in line with CPI to £4,368 (2018/19: £4,260).
Financial year 2019 (commencing 1st April 2019) = 19%
Financial year 2020 (commencing 1st April 2020) = 17%
From 6th April 2019, the minimum period throughout which the qualifying conditions for Entrepreneurs Relief (ER) must be met will be extended from 12 months to 24 months.
He also announced that in addition to existing rules on share capital and voting rights, from 29th October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim.
No major changes to R&D relief were announced.
Annual Investment Allowance (AIA)
Greater capital investment incentives were announced.
Companies will be able to claim £1 million as AIA for expenditure incurred from 1st January 2019 to 31st December 2020.
Business rates for companies with a rateable value of £51,000 or less will be reduced by a third over two years.
Fuel duty has been frozen for the ninth consecutive year.
Stamp Duty Land Tax: relief for first-time buyers
The chancellor announced relief up to the value of £500,000 back-dating from 22nd November 2017, so that those eligible who haven’t previously claimed first-time buyers’ relief will be able to amend their return to claim a refund. This measure does not apply in Scotland or Wales.
Capital gains tax: letting relief
From April 2020 the government will reform lettings relief so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant.
The final period exemption will also be reduced from 18 months to nine months. The government will consult on these changes.
There will be no changes to the 36 months final period exemption available to disabled people or those in a care home.
Making Tax Digital (MTD)
There was no mention of MTD in the Chancellor’s speech. However, as no changes were announced to the VAT threshold of £85,000, the introduction of MTD for VAT registered businesses remains a reality.
VAT and Brexit
Brexit was mentioned only once in the whole budget.
Guidance previously published by HMRC indicates that in the event of a ‘no-deal’ Brexit’, UK VAT-registered businesses importing goods into the UK will be able to include import VAT on their VAT return.
We expect more announcements on this in the lead up to 29th March 2019.
Digital Tech Tax
There will be a new Digital Technology Tax on UK revenues from the big tech companies like Google, Apple, and Facebook. This will extend to profitable companies with sales of more than £500 million globally.
Join our expert accountants Bobby and Lucinda as they pull out the main takeaways of the Budget 2018 for the UK’s freelancers, contractors and small business owners. In particular, you’ll find out how the latest IR35 changes will impact contractors working with private sector clients (download the PDF slides).
Budget 2018 and IR35 Q&A
What amount should I take as a salary?
As the NI thresholds aren’t changing, then we wouldn’t recommend any change from 2018/19. It’s usually tax-efficient for most limited company directors to take a salary up to the Primary National Insurance threshold (£8,424 in 2018/19 and 2019/20). Our article “How much should I take as a salary explains more.
What is happening for MTD?
A: There was no further announcement, so MTD for VAT is all that’s been confirmed. This means all VAT registered businesses over the VAT threshold (£85,000) will need to submit using MTD compatible software. Crunch will take care of this for all our clients. If you’re a Crunch client then please do not register for MTD for VAT returns online until you hear from Crunch.
IR35 – What should I do now to prepare?
If your contract is through an agency – contact your agency to see how they are engaging end-clients on updates to contracts and reviewing working practices to comply with the new rules. Find out about any expected impact on contractor rates. You might want to think about increasing your daily rate if your contract is likely to be deemed inside IR35.
If your contract is direct with the end client – speak to your end client about the preparations they’re making to update contacts and review working practices to comply with the new rules. Find out any expected impact on contractor rates. You might want to think about increasing your daily rate if your contract is likely to be deemed inside IR35.
Either way, your end client will need to understand their whole supply chain and decide whether the contract is in or outside IR35.
You can also apply HMRC’s online tool to your contracts – Check Employment Status Tool (CEST).
Here are some questions we received from the webinar audience:
Q: What are the key things we need to do to avoid being caught by IR35?
Q: Regarding IR35 changes: if the end client is an overseas entity, will they fall into the jurisdiction of the IR35 changes?
A: HMRC has published guidance on Gov.uk site. The off-payroll working rules still need to be considered if the worker, intermediary or client is abroad. The off-payroll working rules can still apply if the intermediary is not in the UK but the worker is living in the UK and does work for a client in the UK.
Q: How is IR35 working in the public sector? Are personal services companies charging less when the costs transition to the end client?
A: HMRC says it’s collecting £400m more employment tax following the reforms in the public sector. Opinion is divided on the accuracy of that amount. Some contractors are reporting that where their end clients are unwilling to meet all of the employer’s NIC due (13.8%), the net amount paid over to the contractor reduced and that any increase in contractor rates didn’t keep pace with the additional employment taxes due.
Q: IR35 extends to medium and larger businesses. Is this referring to the end client or my limited business?
A: It refers to the end client, not the limited company/contractor doing the work.
Q: Should I be looking for Statement of Work contracts to protect myself from IR35?
A: It’s unlikely a Statement of Work (SoW) can offer any ‘protection’ from IR rules. The SoW will need to be consistent with the assignment contract and working practices. As we said above, it all depends on the contract you have with your clients and your actual working practices – HMRC would look at both in the event of any investigation.
Q: Do you have a table showing the most efficient payment profile between salary/dividends which considers co tax, personal tax and NI?
A: Our Take Home Pay Calculator can give you a guide based on the 2018/19 tax rates and thresholds. We use a simplified rule of thumb that suggests that around £30-35k in profits, it starts to be more efficient to be a limited company.
Q: Is switching to using an umbrella company rather than working through a limited company now the preferred approach, considering everyone working for any large clients will now (effectively) be caught by IR35?
A: It’s not necessarily the case that all large clients will decide to class all their contract work as inside IR35 – it’ll depend on the nature of the work. They’ll obviously want to avoid being caught out or face possible fines and reputational damage if they were found to have got it wrong. If a contract genuinely is outside IR35 then we expect they’ll continue to treat it as such, otherwise they would face additional costs such as Employers National Insurance.
Q: When you say IR35 double-whammy: what do you mean by “reduced rate?” What double whammy?
A: The double whammy is (1) less take-home pay (2) more tax to pay.
Some commentators estimate contractor rates would need to increase by 22% to cover the additional cost of employment taxes to keep the contractor’s take-home pay (after tax) intact.
Whether you’re a freelancer, contractor, startup or small business, we know working for yourself isn’t the standard nine-to-five. You need service and support that fits your lifestyle, with unlimited support from experts who are accessible, knowledgeable and passionate about helping you grow.