As the dust settles on Chancellor Jeremy Hunt’s Autumn Statement 2022, one thing is for sure – contracting is alive and well and will continue to grow. So says Dave Chaplin, CEO of ContractorCalculator.
“This budget could be summed up in two words – dull and taxing. But, dull is a relief compared to the uncertainty rollercoaster that the Conservatives have forced on the freelance sector over the past few years, “ says Chaplin.
“Everyone will pay more tax as the UK heads into a recession, but we all know where to direct our efforts. Contracting will continue to thrive.”
Taxes affecting contractors
Contractors who work via limited companies on an “Outside IR35” basis will pay more tax due to an increase in corporation tax, the reduction in the dividend tax allowance, and the increased tax rate on dividends. For those earning over £125,000 per year, the 45% income tax rate will kick in earlier.
- Corporation tax: profits up to £50,000 yearly are 19%, and then 25% for earnings over £250,000. Profits between £50,000 and £250,000 will be taxed using marginal relief.
- Dividend Allowance: The allowance will be reduced from £2,000 to £1,000 from April 2023 and then to £500 from April 2024.
- Income Tax: The additional rate threshold (ART) will be lowered from £150,000 to £125,140 from 6 April 2023.
- Dividend tax rates: Rates will be 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate). These have increased by 1.25%.
Chaplin says: “It is inevitable that the tax disparity between employment and freelancing will continue to diminish as the Treasury seeks to shore up the “threat to the exchequer” due to the global movement towards higher numbers of people choosing to be their own boss and move to self-employment.
“But, even if the tax differential approaches parity, and the alleged ‘tax-motivation incorporation’ argument falls away, the flexible workforce will continue to grow.”
What next for IR35 & Off-payroll?
Chaplin says that the Off-payroll IR35 reforms are now clearly here for the long term: “There was never any chance of a repeal happening again because Sunak & Hunt have returned to the traditional way Governments run the economy. Just do what the Treasury tells them.
With the previously brave mini-budget, Truss and Kwarteng attempted to break the mould and focused on a tax-cutting pro-growth agenda. But, the considerable backlash has resulted in the UK having the highest taxes for fifty years. Chaplin says: “It’s going to be difficult for the Conservatives to claim they have a pro-growth agenda and are a champion for small business, after the battering the self-employed have had over the past few years.”
Chaplin thinks that the Treasury project to crack down on the self-employed will continue and believes that the ‘deemed employment’ project will be completed after the next General Election. Chaplin says: “Whichever party is in power will be encouraged by the Treasury to remove the small companies exemption within the Off-payroll legislation. By that time, firms will have needed to get in place a robust IR35 regime, which is entirely doable.”
What next for the freelance market?
Chaplin thinks that the freelance market will continue and points to the fact that it has been reshaping itself since April 2021, when Off-payroll entered the private sector: “The old way companies sourced freelancers is now choaked with layers of legislative sludge created from years of legislative tinkering by the Treasury and HMRC, namely Chapters 7, 8, 9 and 10 of the Finance Act. Firms have had enough and are now choosing an alternative, more frictionless route.”
In April 2021, we saw many firms hired via large agency supply chains adopt the knee-jerk response of pushing contractors to use umbrella companies – but that has proven very costly and considerably increased rates. Chaplin says: “The umbrella route means almost half of the hirer’s investment is paid in tax. That is a huge overhead for the hirer and not globally competitive. Why would they choose that route when other more attractive options are available?”
Chaplin says he is seeing a surge towards hirers now moving to the different target operating model. Work is packaged and outsourced to consultancies, who can hire contractors from a global pool, including the UK.
Chaplin concludes: “Whilst the Treasury and HMRC would prefer everyone to be on PAYE, global market drivers and the underlying motive of people wanting to be their own boss means that alternative models are likely to become the norm.”
“Longer-term, I envisage the lower end of the market still being serviced by agencies who put agency workers on payroll or via umbrellas, but the higher end of the market will be serviced via consultancies and associate networks.”