Contractor companies scrutinise the bottom line in wake of Autumn Statement 2022

Contractors appear to be taking a long hard look at the viability of their limited companies, not all together convinced at accountants’ claims they are financially better off than PAYE.

One of those accountants, Dan Mepham at SG Contractor Accounting, said after Autumn Statement that the ‘tax tail would not wag the dog’ for most limited company contractors.

But online, his assessment – and Integro Accounting’s, stating dividends to “still” be beneficial despite the allowance heading for a £1,500 cut, was met with disagreement.

'Closing may be the better option'

One individual contractor advised another concerned about whether ‘Ltd’ would still have the edge that “it will depend [on if you’re] happy to plough a lot of your profits into a pension.”

“If [not], closing the company may be the better option,” wrote the PSC, who fears that fused with the also incoming hike in corporation tax, her PSC is “no longer financially viable”.

But it’s not just potentially higher corporation tax (applicable from April 6th 2023 on profits over £50,000) that directors are having to factor in to scrutinise the bottom line.

'Additional annual tax liability of £590'

Uncovering a not insignificant take-home pay dent, Moore Kingston Smith reflected on new calculations, prepared by the chartered accountancy firm exclusively for ContractorUK:

“The slashing of the dividend allowance comes at the same time as the increase in the rates of tax on dividends and a drop in the additional rate threshold to £125,140.

“The top rate of tax on dividend has increased from 38.1% to 39.35%, so the dividend allowance being reduced by £1,500 would mean that an additional annual tax liability of £590.25 will be incurred by some as a consequence of the lost allowance,” the firm said.

'Headaches for top earners'

Since chancellor Jeremy Hunt more than just U-turned his predecessor’s move to abolish the 45p tax rate (by Hunt reducing the current threshold of £150,000 from April 6 2023), Hargreaves Lansdown has estimated that the average additional-rate taxpayer will be £1,200 worse off.

“The cut in the higher rate threshold from £150,000 to £125,140 means more than 200,000 more people will be dragged into the 45% bracket,” says Hargreaves Lansdown personal finance analyst Sarah Coles.

“Those on higher wages tend to have more wiggle room in their budgets, but rising prices have created headaches for top earners.

Those with big mortgages will feel particular pain from higher mortgage rates too, so this additional tax blow is an unwelcome extra burden. It’s not a massive money-spinner for the government, so it’s likely to be more of a symbolic gesture that we’re all in it together.”

'Absolute joke'

But even less of money-spinner for the government is Hunt’s decision to halve the dividend allowance to £1,000 from April 6th 2023 and then halve it again from April 6th 2024 to £500.

Previous policy towards limited companies is irking contractors too. On LinkedIn, one reflected:

“Pay all that tax [proposed by the chancellor, following the total of] £0 in support [from the government] through whole of covid. Absolute joke.”

'No national insurance'

It is in the same thread that the PSC leaning towards parting ways with her PSC said that from next April, “it appears the level of taxes being imposed on a limited company will erode the benefit of having one.”

Yet Brookson Group’s managing director Matt Fryer clarified: “The tax difference is not what it used to be, but remember no national insurance is paid by contractors working via a PSC.

“This is what still makes [operating through a limited company and drawing dividends] more attractive than PAYE.”

'Highest tax burden since Second World War'

The contractor in question sounds adamant however, saying she will base her decision on “the overall tax burden, rather than [the] savings [from] individual taxes.”

However the overall tax burden --  as a direct result of Hunt’s Autumn Statement announcements – is going to hit its highest level since the Second World War.

The Office of Budget Responsibility elaborated on its assessment: “This higher tax burden pays for a larger state whose total expenditure rises from 39 per cent of GDP before the pandemic to 47 per cent of GDP this year, before falling back to 43 per cent in five years’ time.

“This leaves public spending around 3 per cent of GDP larger than we forecast in March, and its highest sustained share of the economy since the late 1970s.”

'Grow profitably withount insanely high costs'

The OBR’s figures come after Michelle Ovens CBE, founder of Small Business Britain, reportedly criticised the government for penalising small company owners for how they “legitimately” pay themselves.

Later, Ovens tweeted: “We need to give businesses the opportunities to grow profitably – without insanely high costs. And move barriers out of their way.”

Featured in a Financial Times case study since the divided changes at Autumn Statement, Askew Brook, a firm specialising in software development reflected on the policy: “It just means we have less money to go around, be it to take on more staff or pay higher wages.”

Profile picture for user Simon Moore

Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
Printer Friendly, PDF & Email

Contractor's Question

If you have a question about contracting please feel free to ask us!

Ask a question