Contractors can expect to be worse off following a range of measures introduced by the Chancellor in this year’s Budget, with frozen allowances increasing contractor income tax bills in real terms. There was also confirmation of the 50% tax bands, as well as cuts to allowances and pension relief for higher earning contractors.
As the BBC’s Political Editor Nick Robinson so neatly summed it up, the 2010 Budget was: “Short on economic announcements, but long on party political statements.”
An analysis of the detailed Budget document reveals that there are no changes to core contractor issues, such as IR35, Section 660, umbrella expenses and NICs on dividends from personal service companies (PSCs). In addition, VAT remains unchanged, despite forecasts of a hike to 20%.
£500m in increased tax take – contractors in the firing line
However, contractors holding assets overseas are in the firing line, as anti-avoidance measures are beefed-up and offshore tax-shelters are targeted. An additional £500m in increased tax take per year is anticipated through HMRC’s activities and the doubling of fines. Employee Benefit Trusts get a special mention, but no concrete plans are announced.
Against a backdrop of lower borrowing forecasts, but also lower growth forecasts, the Chancellor has presented what he calls a budget that will, “Allow the talent of the British people to flourish… secure recovery, tackle borrowing and invest in our industrial future.” But there are no measures designed to improve the fortunes of the flexible workforce nor that recognise its importance to economic recovery and growth.
Contractors in business
Limited company contractors will see few changes in the coming financial year, as the corporation tax rise is deferred by another year, but the planned increase in National Insurance Contributions (NICs) is still set to go ahead in 2011, penalising those contractors with limited companies that employ the contractor and others, such as a spouse.
The highlights for limited company contractors are:
- No increase in corporation tax
- No increase in Capital Gains Tax (CGT)
- Increases in capital allowances to encourage investment
- Entrepreneurs’ Relief allowances doubled to £2m, a benefit to ‘contracterpreneurs’
- No business rates for one year for an estimated 340,000 small and medium enterprises (SMEs), including contractors with their own business premises
- Time to pay scheme extended for firms with cashflow issues, allowing them to delay payment
- A new investment corporation – UK Finance for Growth – will provide businesses with capital
- A pledge is made to make available 15% of central government contracts to SMEs and pay 80% of invoices within five days.
There are no measures designed to improve the fortunes of the flexible workforce nor that recognise its importance to economic recovery and growth
Contractors working in some sectors will benefit indirectly, as a new £2bn fund has been made available for ‘green investments’, focusing on the offshore-wind sector first. There are also tax breaks for the oil and gas sector, designed to increase exploitation of these natural resources in remote North Sea oil and gas fields.
But despite the Chancellor’s claim that the government does “Recognise the role government can play in providing a launchpad for businesses to succeed”, there were no specific measures to encourage knowledge workers or the flexible workforce.
Changes to contractors’ personal circumstance
Savers and first-time home-buyers are the only contractors who will benefit from this year’s Budget. The Chancellor confirmed the freeze in personal allowances, which means all contractors will pay more tax in real terms in the coming financial year. Key measures for contractors include:
- Fuel duty is to increase by 1p in April, 1p in October and 1p in January 2011
- ISA allowances are increased from £7,200 to £10,200
- First-time buyers pay no stamp duty on house values up to £250,000, a measure to be paid for by a 5% extra stamp duty on the sales of properties worth in excess of £1m
- Inheritance tax threshold (IHT) is frozen for four years, increasing IHT in real terms
- Alcohol duties increase 2% above inflation.
And the following measures from the Pre-Budge have been confirmed:
- 1p National Insurance Contributions from April 2011
- 50% tax band for contractors earning over £150k
- Contractors earning over £100k will see personal allowances gradually removed
- Those earning over £130k will lose tax relief on pension contributions.
So, contractors who have yet to enter the property market will benefit from no stamp duty on properties worth up to £250,000, which will apply to this year and the next, but those with properties worth over £1m face an increased 5% stamp duty.
Tax-free ISAs will increase from £7,200 to £10,200 per year, and half can be saved in cash and will increase annually in line with inflation, allowing contractors to tax efficiently invest more of their net earnings.
Anti-avoidance measures set to continue
An estimated £500m of additional tax revenues are forecasts as a result of the anti-avoidance measures already in place, although it is widely recognised that HMRC lacks the resources to enforce the powers already in place.
Under the heading of ‘Achieving Fairness’, the government is clearly targeting offshore tax solutions, announcing it plans to take action over the ‘use of arrangements to reward employees through the use of trusts or other intermediaries, with the purpose of avoiding, deferring or reducing liabilities to income tax and NICs or avoiding restrictions on pensions tax relief’. No details of this future action have been released, but contractors using these schemes should consider themselves as having been warned.
On balance, contractors have suffered much less from this Budget as might otherwise have been the case.