Autumn Budget 2021: predictions for contractors
The 2021 Autumn Budget is due to be delivered next week, on Wednesday October 27th, and as the country’s finances have taken a bit of a hit since March 2020 -- as a result of the government supporting workers and businesses through the coronavirus pandemic, it’s expected that there will be changes to taxation to help redress the balance.
But a good deal of tax changes have already been announced, and two of the most key incoming changes will have a direct impact on the UK contracting sector, writes contractor accountant Patrick Gribben, head of client services at Intouch Accounting.
In particular, the rates of tax chargeable on companies (corporation tax) are set to increase from 2023, and the rates for National Insurance Contributions and Dividend Income are set to increase by 1.25% from April 2022.
But what else could chancellor Rishi Sunak have up his sleeve, in terms of changes to the tax landscape and what might the impact on contractors be?
Changing the period of assessment for self-employed people
Aimed at sole traders, partnerships and other unincorporated business (so not contractor limited companies), this potential change in Mr Sunak’s Red Book wouldn’t, by itself, generate more tax.
But because it centres on taxing businesses’ trading profits in the tax year they arise (instead of at the accounting period ending the tax year), it would potentially offer a cashflow boost to HMRC. Given the backdrop of how expensive covid has been, bringing in some taxes sooner than the Treasury coffers expected will be a hard outcome for the chancellor to turn down.
Capital Gains Tax
There has already been a couple of changes to CGT tax in recent years, notably the restrictions to taking income as a capital distribution for those who seek to carry out a ‘similar trade or activity’ within 24 months of dissolving a company, and the cap to the lifetime allowance for BADR (previously Entrepreneurs’ Relief), from £10m to £1m.
But the Office for Tax Simplification has been exploring further ways to simplify the tax regime in various areas, and one of the suggestions is that the rates of tax charged on capital gains be aligned with those for income tax.
This would see the maximum rates increased from 18% for basic rate taxpayers and 28% for higher rate taxpayers, to 20% and 40% respectively. Given the sheer scale of the uplift, it’s definitely one to watch out for on Wednesday, especially for those contractors planning to sell assets, including investment properties.
IHT is a complex area of tax and the OTS have reviewed this area also.
But IHT is also becoming an increasingly important source of income for HM Treasury and it’s not impossible that there will be some ‘simplifications’ that could generate additional revenue for HMRC.
The personal allowance is set to be maintained at current levels up to and including the 2025/26 tax years.
With inflation currently being higher than expected, the real value of the personal allowance will be eroded across that period which, when added to the current upwards pressure on wages, will mean more people paying more tax.
But given the tax-free allowance affects millions, and that its trajectory is currently already set, Mr Sunak tinkering here seems unlikely.
Eagle-eyed ContractorUK readers will have noticed I’ve not yet addressed IR35.
Well, the changes to the off-payroll rules have been ‘interesting’ to say the least.
Positively, we are starting to see evidence that some end-hirers are working within the reformed legislation (effective since April 6th 2021) to engage with contractors on an outside IR35 basis. There is still an element of confusion over the rules however, and their application. So there’s still a long way to go before normality resumes.
Because of that dual confusion, a clarification or two on IR35 from the chancellor at Wednesday’s Autmn Budget 2021 might be helpful. But actually, it is unlikely that Mr Sunak will feel a need to be too bold – in the contractor sector or elsewhere, given those significant tax hikes already waiting in the wings. Who knows; in the pursuit of the status quo that we all want after the pandemic, don’t be surprised if Mr Sunak uses the Budget to tie up small loose ends, such as closing out some of the active consultations into areas such as the R&D regime and changing the tax year-end.
But finally, beware hidden horrors on the eve of Halloween
All in all, I don’t expect any nasty surprises that directly affect limited company contractors afresh, but with this year’s Budget being so close to Halloween, the devil really will be in the detail.