In addition to IR35 reforms, Chancellor Philip Hammond’s Spring 2017 Budget Announcement is due to have further consequences for contractors, including a reduction in the dividend allowance and an increase in National Insurance Contributions.
How will the changes affect contractors?
In summary, these are the changes which will have an effect:
- A reduction in the tax free dividend allowance from £5,000 – 2,000 from April 2018
- Class 2 National Insurance Contributions will be eliminated in 2018
- Class 4 National Insurance Contributions will increase to 10% for those who are self-employed in 2018
- IR35 reforms to come into force from 6 April 2017.
Reduction in the tax free dividend allowance
Contractors who are part of a Limited company will see a tax free dividend allowance decrease of more than 50%, from £5,000 – £2,000 from April 2018. This is a tax rise of £225 for limited company contractors.
The Chancellor’s belief that two people performing the same work should be taxed the same has come to fruition, stating:
“A strong society requires a tax system that is fair.”
National Insurance Contribution changes
From April 2018 there will be an Class 2 National Insurance Contributions (NICs) will be abolished. Class 4 NICs will increase from 2% to 10% with an additional increase of 1% in 2009.
Announcements, such as changes to the flat-rate VAT percentage, personal tax free allowance and corporation tax, made in the Autumn Statement 2016 will come into effect in April 2017. These are summarised as follows:
New flat-rate VAT
There will be an introduction of 16.5% flat-rate VAT from April 2017. This will affect most contractors as it applies to companies with limited costs such as those who are labour-only. This will affect ‘limited cost traders’ whose costs of goods purchased is less than 2% of turnover (or annually less than £1,000).
Personal tax free allowance
This will rise from £11,000 to £11,500 from April 2017. The higher rate tax threshold will also rise to £33,500 from £32,000.
This will decrease to 19%, commencing April 2017. Over the coming years this will reduce further to 17% by 2020.
These will take effect from 6 April 2017. Click here for an overview of the IR35 reforms and how they may affect you.
IR35 affects all IT contractors who do not meet HMRC’s definition of ‘self-employment.’ You can use HMRC’s Employment Status Indicator to determine your employment status.