What a contractor accountant calculates Spring Budget 2023 to mean for limited companies
It’s hard to find anything totally new in the chancellor’s Spring Budget directly helping all limited company or PSC contractors, writes chartered accountant Graham Jenner, founder of Jenner & Co.
The big announcement for Personal Service Companies as far as most of us contractor accountants are concerned is the raising of corporation tax to 25% from April 6th 2023. But that was first proposed by this chancellor Jeremy Hunt’s boss, Rishi Sunak, when he was chancellor in 2021.
Taking Jeremy’s help to pay for Rishi’s rises…
So contractors, it seems that there will be no playing these two off against each other! Or will there?
While the corporation tax rate appears to be just a few weeks away from a huge hike, from the current 19% rate, only companies with profits over £250,000 will pay the full 25%.
In fact, companies with profits of less than £50,000 will continue to pay 19%, while companies with profits between £50,000 and £250,000 will be entitled to ‘marginal relief,’ meaning that, for those companies, the overall rate is on a sliding scale from 19% to 25%.
Devil in the detail
But what’s new? The devil is notoriously in the detail at Budget announcements and so, it may take a few days for the real dents to contractor take-home pay to be spotted, unpacked and totted-up.
One positive though, is a new increase in the annual pensions allowance. This allowance is increasing from £40,000 a year to £60,000 a year. While the number of PSCs who stand to benefit from this uplift might be in question, this is a welcome measure from Mr Hunt for directors wanting to make additional contributions.
Is your client an R&D intensive SME?
If you’re a PSC in the technology sector, you might like to know that the chancellor announced a new scheme for 20,000 SMEs in the UK – starting from April 1st 2023 and worth around £500 million per year.
However, in a sign that the devil isn’t always that expert at hiding in the detail, it is already apparent that the scheme is targeted specifically at loss-making ‘R&D intensive’ SMEs.
So this measure, while a welcome incentive for those specific companies to invest in R&D, won’t directly help PSC contractors. That said, depending on your sector, skill and supply chain, your business may notice some positive ripples. In short, there may be additional demand for those PSC contractors who offer services to these 20,000 companies.
The back-to-work Spring Budget (was silent on IR35)
Departing from taxation for a moment if I may, the chancellor’s main focus in his Budget speech was on encouraging people back to work. Or he wants people to remain working longer or ensure part-time workers work longer hours. Either way, it’s all in an understandable but slightly ham-fisted attempt to deal with labour shortages.
Some might argue that Hunt’s cancellation of the repeal of the IR35 reforms last year was, itself, a contributor to skills shortages in certain sectors. We are certainly aware of a significant number of highly skilled PSC contractors who ‘retired early’ following the mini-Budget in September 2022. This was in addition to those PSCs who had already hung up their contracting boots prematurely, following the introduction of the reforms in the private sector on April 6th 2021.
Nothing announced in this Spring Budget is likely to bring or attract those people back to work – not according to my initial calculations anyway.
Corporation tax reckoner
I’d like to end where I started, by looking at what was the biggest and most taxing change for PSC contractors pre-Budget -- corporation tax, because it’s still the biggest and most taxing change post-Budget.
- Profits up to £50,000 = No change in your HMRC payments.
- Profits of £100,000 = Your corporation tax bill will be higher by £3,750. If taking all profit as a dividend, your net take-home pay after tax will be down by about £2,500.
- Profits of £150,000 = Your corporation tax bill will be higher by £7,500. If taking all profit as a dividend, your net take-home pay after tax will be down by about £5,000.
Pensions contributions, coming into their own
The good news about the bad news-figures, above, means that making pensions contributions through your limited company will attract higher tax relief than it would have done previously. That may encourage more PSC contractors to make pensions contributions, or go ahead and use the additional £20,000 now available, if you were already contributing the maximum.