Summer budget 2015

Well, I certainly feel the we are all in it together anthem now following the first fully Conservative budget since the late 90s.

UK Contractors working as one-man limited companies, and owners of small businesses generally, that realise a lot of their income in the form of dividends are being hit hard in the next tax year (i.e. from April 2016) which means, I expect, that many contractors will drop out (back to permanent employment) and others will put their rates up.

Essentially, our tax bill goes up 7.5%! For higher rate payers, the effective tax rate will be 46% (compared to employees who pay 40%).

Currently, dividends are paid out of profit after Corporation Tax (20%), grossed up with a notional 10% tax credit (so, e.g. a £3000 dividend is treated as £3,333 income) and  taxed at 10%, 32.5%%, 37.5% for basic/higher/additional rate taxpayers – therefore, less the 10% tax credit, the effective rates are: 0%, 22.5% or 32.5%.

Next tax year, the rates: 0%, 22.5% and 32.5% become: 7.5%, 32.5% and 38.1%.  No tax credit. First £5000 is tax free (but counts towards income).

There are some other changes as well, which do not benefit us much, and a review of the IR35 legislation designed to catch disguised employees is also being kicked off to catch more people. The expense allowances are also to be looked at (whereby travel costs allowances are tax free). I do object to people working as disguised employees just so businesses can avoid paying the full cost of those employees, but when the principles are applied unfairly to those of us who are genuinely contract workers, with all the risks, costs and liabilities associated with that, then it very demotivating and creates a huge overhead in the market in people having to leap through all sorts of hoops just to be in a position to prove they are not disguised employees (tricky when the criteria are not published in a definitive form). Perhaps the review will improve matters, but somehow I doubt it.

We are still a little bit better off financially than people on standard Pay As You Earn (PAYE) tax arrangements, but given the higher risks (gaps between contracts, no sick pay, no insurance, no pension, own training costs, etc.) the gap is greatly eroded.

       

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