Autumn Statement 2022 round-up for contractors

Today’s Autumn Statement 2022 comes at a time of significant challenge for the UK economy. Along with the after-effects of Brexit and then the pandemic, the war on Ukraine, surges in energy prices, high inflation, an ever-increasing interest rate. And then the Truss Growth Plan did even more damage.

Context is king

It’s a context that’s massively important and to be borne in mind when looking at your individual tax payments going slightly up rather than slightly down, writes tax lawyer Rebecca Seeley Harris, author of CEST Explained and the founder of ReLegal Consulting.  

One good thing for contractors at Mini-Budget 2022 was the repeal of IR35 reform, or more accurately the repeal of the 2017 and 2021 Off-Payroll Working Reforms. But as we all painfully know by now, the current chancellor Jeremy Hunt reversed the repeal a few weeks ago and bar a passing reference, he hasn’t mentioned IR35 again in today’s Autumn Statement. So for contractors, it’s a term that they’re all familiar with, especially if they’re on top of their IR35 terminology – BAU (‘Business As Usual’).

An even split of tax rises and spending cuts

What is interesting about today’s fiscal event is that the chancellor decided to split the burden equally between tax raises and cuts to public spending. This is not always the case as in the past George Osbourne, for example when he was chancellor, cut public spending by 80% and raised taxes by only 20%.

Having said that the burden would be shared equally, what was interesting is that the only significant tax change from Mr Hunt today was made to the 45p rate of tax for higher-rate taxpayers. The main impact for taxes, then, is the freezing of the thresholds for income tax, national insurance, and VAT (staying at £85,000), amongst others.  This is called fiscal drag.

Fiscal drag

This is a deflationary measure to slow the growth of the economy caused by a lack of spending because of higher taxation and decreased demand for goods and services. 

A larger proportion of a person’s income now has to pay for basic goods so there is less income for discretionary spending. This will result in a drag on the economy. The effect of fiscal drag is to raise government tax revenue without explicitly raising taxes.

This is used when inflation results in higher income and then individuals moving into a higher tax bracket and paying more of their income in taxes. So although the threshold rate doesn’t rise, people will be taxed by being dragged into the higher bracket whether that is basic rate or higher rate.  It is commonly known as a stealth tax.

The thresholds were originally frozen until 2026 but, today, the chancellor has increased that in the Autumn Statement to 2028 for most taxes.

The following is a list of tax changes at Autumn Statement 2022 that may affect contractors:

Dividend Tax

The dividend tax was raised by 1.25% points alongside the rise in National Insurance Contributions as a result of the Health and Social Welfare Levy.

Although the raise was reversed for employers, employees and the self-employed, and the Health and Social Welfare Levy was cancelled, the 1.25% points increase for dividends was not. So, the dividend rates remain at:

8.75% for lower-rate taxpayers

33.75% for higher-rate taxpayers

39.35% for additional-rate taxpayers

The chancellor has, however, cut the tax-free allowance for dividends from £2,000 to £1,000 from 2023. And he made a further cut to the allowance, with the effect that it will be just £500 in 2024.

Off-payroll reforms

As mentioned, the off-payroll reforms for 2017 and 2021 were repealed in the Truss Growth Plan and then a few weeks later reinstated by Mr Hunt. There has been no change in this in the Autumn Statement. The amounts of revenue that the reinstated IR35 reforms will raise are contained in today’s ‘Green Book’ however.

Corporation Tax

Corporation tax rates, having been cancelled in the Truss Growth Plan, were then reversed by Mr Hunt. 

So corporation tax for most small businesses will remain at 19% (assuming profits under £50,000), but will rise to a headline rate of 25% for those with over £250,000 profit from April 2023. There was no change to this corporation tax plan in the Autumn Statement.

VAT

The VAT threshold rate is currently set at a turnover of £85,000 and the chancellor used Autumn Statement to freeze that threshold until 2026.  This means that more small businesses will be dragged into the VAT regime in the next four years.

Income Tax

The chancellor has already cancelled the plans for the 1% point cut in the basic rate of income tax from 20p to 19p, previously promised by the prime minister Rishi Sunak, when he was the chancellor. This was to be introduced in 2024.  The current chancellor did not change any of the income tax rates other than the higher rate of tax. The higher rate tax threshold will drop from £150,000 to £125,140 (but don’t forget that there is no personal ‘tax-free’ allowance on income over £125,140).

The Income tax thresholds were to be frozen until 2026 but, the chancellor today extended that freeze now to 2028.

National Insurance Contributions

As reported earlier in the dividend section, the 1.25% points raise in NICs rate was cancelled but the increase in the threshold remains at £12, 570.  This threshold will be frozen until 2028.

Good, bad or indifferent?

My view is that the chancellor has done the job that needed doing to stablise the economy. 

I think it was a given that the dividend tax free allowance would be cut and actually, I thought it might be the whole £2,000 in one go! 

For those that are not near the thesholds they won’t see a difference, it is only those that will be dragged in over time that will suffer.

Less positively for umbrella contractors, it’s truly a pity that there was no announcement on funding for the Single Enforcement Body. We can only hope that measures regarding umbrella company regulation are recommended by the Director of Labour Market Enforcement in the soon to be published Strategic Plan for 2023-24.