Tax Blog

THE SUMMER BUDGET AND PERSONAL SERVICES COMPANIES

The first Conservative only budget in more than 19 years was certainly not welcomed by the contracting community. We have highlighted the main areas that will be changing from 6th April 2016 below.

From a contractor’s point of view one of the biggest changes announced in the budget is the change to the way in which dividends will be taxed from 6th April 2016.

As it stands all UK dividends are paid with a notional tax credit of 10%. That means that for every £1,000 of dividend income received by a person HMRC treats it as being a gross dividend of £1,111 and assumes that £111 in basic rate tax has already been paid. That’s the reason why non-taxpayers and basic rate taxpayers have no further tax to pay on dividend income.

Higher and additional rate tax payers do, of course, have to pay tax on dividend income that falls into the higher or additional rate bands. The rates at which this tax is currently paid is 25% for higher rate taxpayers and 30.56% for additional rate taxpayers.

However, with effect from 6th April 2016, dividends will be taxed in a different way.

From 6th April 2016, the current system of notional tax credits on dividends will no longer be used. Instead, everyone will be entitled to receive £5,000 of dividend income free of tax. The balance of any dividends paid over £5,000 will then be taxed according to whichever tax band applies to the aggregate amount of the dividend and the recipient’s other taxable income.

The rates at which dividend income over £5,000 will be taxed are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

If, for example, someone receives a dividend of £10,000 on top of other income of £50,000 then they will be due to pay tax at 32.5% on the portion of the dividend (in this case, £5,000) that is not tax-free. Under the present rules the whole dividend of £10,000 would be subject to tax at 25%. In that example, the taxpayer would pay less tax under the new system.

However, the reverse would be true if the recipient of the £10,000 dividend had other income of £25,000. Under the current rules no tax would be payable on the dividend. Under the new rules, £5,000 of the dividend would be liable to tax at 7.5%, thus leaving the taxpayer £375 poorer than under the current rules.

It is more important than ever that contractor’s seek expert professional advice in this area to ensure that they are optimising their tax efficiency. For individual examples of how this may affect you please contact our tax department – 0845 671 1105

ABOLITION ON USE OF NIC EMPLOYMENT ALLOWANCE BY PSCs

In addition to changing the system for taxing dividends the Chancellor announced that contractors’ who are the sole employee of their own personal services company (‘PSC’) will no longer be allowed to claim employment allowance on employers’ National Insurance contributions.

At present, a contractor who operates a PSC can claim relief on the first £2,000 of employers’ National Insurance contributions paid by them. This, says Mr. Osborne, will cease.

IR35 REFORM

The Government has asked HMRC to consult with businesses to improve the effectiveness of the current IR35 legislation. We will keep you updated regarding any potential changes affecting PSC contractors as and when they are announced.

ABOLITION OF TAX RELIEF ON TRAVEL & SUBSISTENCE EXPENSES FOR UMBRELLA AND PSC CONTRACTORS

The Chancellor also announced a consultation document (released on 8th July 2015 – https://www.gov.uk/government/consultations/employment-intermediaries-and-tax-relief-for-travel-and-subsistence ) about plans announced in the March budget to end tax relief on home-to-work travel and subsistence expenses for PSC and Umbrella contractors with effect from 6th April 2016. The government’s intention is to make those reliefs unavailable to such contractors who work under the supervision, direction and control of another person.

We will keep our clients updated on these changes as the consultation develops.

OVERVIEW

Taken individually it is clear that these changes are significant. Taken together they represent a financial challenge to contractors using Umbrella Companies or Personal Service Companies.

In light of the changes careful tax planning will assume an even greater degree of importance than at present. It would therefore be prudent for owners of PSCs and users of Umbrella Companies to take expert professional advice on how best to mitigate the potential effects of the governments’ reforms. Please contact our tax department for further updates and information – 0845 671 1105.

Let’s hope that by the time the proposed changes come into force that they will provide a solid, fair and workable framework that will allow contractors and stakeholders to move forward with some certainty while maintaining some of the tax breaks associated with our mobile and highly skilled temporary workforce that the UK economy so heavily relies on.

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