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 Budget 2011 for Contractors23 March 2011
We've identified the key points from today's budget from a contractor's perspective. These are summarised below. The Approved Mileage Allowance Payments (AMAPs) will increase from 40p to 45p for the first 10,000 miles travelled in a tax year from 6th April 11. Over 10,000 the rate remains 25p per mile. Contractors who travel by car will be able to claim up to an additional £500 of tax relievable expenses.
The government's full response to the Office of Tax Simplification's (OTS) recent review (summarised here) and the deadline for its full report were promised by the summer during the budget announcement. But a broad agreement with the recommendation to merge Income Tax and National Insurance contributions was indicated. The wording suggests a long term strategy recognising that; "...any change will be complex and involve a wide range of policy and implementation issues." The next step is a consultation document to be published later this year. A key concern that such a strategy might remove the tax advantage of operating a Personal Service Company by applying NICs to dividend income was removed; "The Government will not extend NICs to individuals above State Pension age or to other forms of income such as pensions, savings and dividends."
Those contractors paying additional rate tax will have been encouraged that this government sees the 50% higher rate as a temporary measure, but disappointed that they also felt that it isn't yet the right time to remove it.
Of the three medium term recommendations put forward for IR35 by the OTS, the government elected the safest route, and left the legislation unchanged. A series of measures to improve the administration of IR35 are to include:
planIT does not expect any of these administrative changes to have a significant effect on contractors using our personal service company services as they are already well-advised on their IR35 position.
The lifetime limit for Entrepreneurs relief is increased from £5M to £10M and the Capital Gains Tax annual exempt allowance (AEA) increases from £10,100 to £10,600. Both these measures may reduce the amount of Capital Gains Tax a contractor need pay at company closure.
As expected, the small companies Corporation Tax rate for 2011-12 is 20%. The budget dropped the main corporation tax rate by 2% (twice the promised 1% reduction) to 26% and also announced a continued annual reduction of 1% each year for three years until the rate is 23%.
The Personal Allowance (for under 65s) for the 2011-12 tax year is £7,475, while the higher rate threshold drops £2,400 to £35,000 targeting the benefit from the increased allowance at basic rate tax payers. The budget also included the announcement that in the 2012-13 tax year the personal allowance (for under 65s) would increase by £630 to £8,105, at the same time the higher rate band decreases by the same amount to £34,370.
For 2011-12 Employee`s Class 1 contributions on weekly earnings becomes 12% on earnings between £139.01 and £817.00 and above £817.00 the rate is 2%. These rates are up 1% on the 2010-11 rates which were 11% and 1% respectively (between £110.01 and £844.00, and above £844.00) Employer`s Class 1 contribution rates also increase by 1% for 2011-12 weekly earnings from 12.8% to13.8% on earnings above £136.00 (up from £110.00). It is now possible for contractors to pay themselves an annual salary of up to £7,072 without making National Insurance Contributions. This brief is for guidance purposes only. In all cases we would recommend that you discuss any queries with professional advisors. planIT Services is a firm of Chartered Accountants regulated by the Institute of Chartered Accountants in England and Wales. Please feel free to contact us if you have any questions relating to this article or other accounting issues affecting contractors. |
