Contractors’ Questions: What tax changes will affect the take-home pay of new contractors?
Contractor’s Question: Unlike the direction of most of the worker traffic I’m seeing, I’m actually going towards limited company contracting as a permie, albeit not for the first time as I’ve freelanced before. I think I’ve refreshed myself enough on invoices and expenses, but anything else -- tax-wise, that’s in the pipeline for contractor which will affect my take-home pay?
Expert’s Answer: Firstly, you still don’t sound sure about invoices and expenses, so here’s a quick pointer or two.
With invoices, it is recommended that you keep track of your invoices on a weekly, or minimally, monthly basis to ensure nothing is missed.
Some end-clients will want you to complete a timesheet that will be used as the base of your invoice. Whichever invoicing is done, the onus is on you to make sure you keep on top of it.
Company expenses recap
In terms of company expenses, any expenditure that is solely for the company need to be put through the business bank account. Many highly rated software programmes, such as FreeAgent, provide a ‘bank feed’ which means regular transactions can be pulled through automatically.
The importance of keeping good records for your company expenses comes down to how much corporation tax you’ll pay. With that tax being 19%, make sure you only pay what you should! Logging your expenses in real-time reduces the risk of anything being forgotten or wrongly logged, saving a lot of headaches in the long run!
What has changed since Budget 2021?
To try to bring you up to speed since you were last in contracting, let us give you the good news first – at Budget 2021 in March, there was no increases to Income Tax, National Insurance, Annual Exemption for Capital Gains Tax, the VAT registration threshold, Inheritance Tax limit or VAT.
In addition, no changes were made to Business Asset Disposal Relief (which you might know as Entrepreneurs’ Relief) so the existing 10% tax on assets and cash on closure still applies to those contractors wanting to close via a Members Voluntary Liquidation (MVL).
To furlough or not to furlough? That is the question (for you to answer)
As an employee of someone else’s up until recently, you’ve probably heard of the furlough scheme. Well, the Coronavirus Job Retention Scheme (JRS) was extended at the Budget until September 30th 2021.
Currently, this allows an employer (including your limited company for example) to claim 80% of ‘usual salary’ for hours not worked by an employee, up to £2,500 per employee per month on furlough. The employee needs to pay the National Insurance contributions (NICs), and the minimum employer automatic enrolment pension contributions.
The extension of the CJRS means that the level of grant currently available will remain until June 20th 2021, after which the level will be reduced and employers will have to contribute towards the wages of furloughed employees. Grants will be reduced such that 70% of furloughed wages will be covered in July (up to a maximum of £2187.50) and 60% for August 2021 and September 2021 (up to £1,875.00).
Be aware, ‘furlough’ needs to be declared on your tax return and your accountant can calculate the furlough, or flexible furlough when not working as many hours, for you.
Corporation tax changes, applicable in 2023
The less good news of the Budget was that corporation tax will rise from 19% to 25% in April 2023 – although that 25% will only hit profits of over £250,000 while remaining unaltered (at 19%) for those making profits of less than £50,000. The new corporation tax rate will be tapered for those making profits between £50,000 and £250,000. And the so-called diverted profits tax rate will rise to 31%.
As you probably remember, legitimate expenses reduce your corporation tax. If you are unsure of what qualifies as a legitimate claim, talk to your accountant who will be able to advise you on what you can and cannot legitimately claim to lower your tax bill. Many contractors may not be taking full advantage of all company expenses, so don’t miss out.
VAT deferral payment scheme can help
PSC contractors have already had their VAT payments deferred from March 20th to the end of June 2020, but you can now also apply for the VAT deferral payment scheme. This means that smaller payments can be spread equally (interest free) rather than having to make one larger payment.
To qualify for this scheme you must have applied online before June 21st 2021 - the later you join, the fewer instalments will be available to you so if this is of interest, fill in the simple online form without delay. This must be applied for by you, the individual, your accountant (your ‘agent’ in HMRC-speak) cannot do this on your behalf.
Your personal tax return
Some additional good news for contractors is that, between April 2021 and April 2026, the personal income tax allowance will be frozen at £12,570. The higher rate threshold (HRT) will remain at £50,270 between those same dates.
The important thing here is to ensure that your tax planning advice is correct from the outset so that you can ensure you’ve got the right salary/dividends plans in place. If you haven’t done so already talk to your accountant so you can be confident you’ve got this working in your best interest.
IR35 private sector roll out has begun
The less palatable part of Budget 2021 was widely expected -- that the IR35 reform roll-out to the private sector would go ahead on April 6th 2021, which it did
Broadly, the reform means that the end-client (not you anymore) must decide your IR35 status or the status of the contract which the client offers you, and should issue a Status Determination Statement. Even if the status gets determined by a third party agency which the end-user has enlisted, the end-user is still responsible and liable for the decision of your IR35 status. Your SDS should be put in writing, and should say if the contract is inside or outside IR35, alongside an explanation for the decision and details of how you can appeal the determination.
The key, as always? Don’t make hasty decisions
We can’t emphasise enough the need to get as informed as you can about IR35, tax rules and rates, and planning for your future. Yes, the decision as to whether you work inside or outside will be decided by the end-client, but if you get clued up about the legislation – like other HMRC requirements facing contractors, you will be able to ask the appropriate questions, keep your options open, and ultimately continue enjoying working as a contractor. Good luck with your return to contracting!
The expert was Christian Hickmott, chief executive of contractor accountancy firm Integro Accounting.