Emergency Budget Analysis for Contractors

June 22, 2010

Several of the measures announced in the Chancellor's ‘emergency' Budget yesterday will have a direct impact on contractors although in most cases these will not come into effect immediately. planIT will ensure wherever possible that any opportunities are fully exploited whilst any increased taxes are mitigated. As yet, the changes announced in this Budget will not require that umbrella and limited company contractors actually operate any differently. Below we summarise the main announcements affecting contractors.

1) Income tax rates

The personal allowance has been increased from £6,475 to £7,475 with effect from 6 April 2011. So that higher rate taxpayers do not benefit from this the basic rate limit for tax will at the same time be reduced by £2,500. This will only reduce the tax liability for lower paid employees and in particular those earning at or near the National Minimum Wage. The Chancellor also committed to raising the personal allowance to £10,000 in the longer term.

2) National Insurance rates

The rate of employee and employer contributions will rise by 1% with effect from 6 April 2011. This is mitigated to an extent by the fact that the threshold at which employers will start to pay National Insurance Contributions will increase by £21 to £131 per week with effect from 6 April 2011. While matters of NI do not usually have a significant effect on contractors operating their own limited companies these changes will affect all umbrella contractors.

There will be an exemption of up to £5,000 per employee from employer National Insurance Contributions for new businesses in respect of each of the first ten employees. This exemption will only apply in respect of businesses outside London, the South East and East of England during the next three years and any business set up from today will benefit. If, when more details are received, there appears to be any potential for this initiative to create new opportunities for our clients based outside of the stated regions we will advise you accordingly.

3) Capital Gains Tax

The capital gains tax rate on non business assets will remain at 18% for basic rate taxpayers and increase to 28% for higher rate taxpayers. These changes will take place from midnight tonight. The annual allowance will remain at £10,100 this year and increase in line with inflation thereafter. The Chancellor advised that he did not intend to reintroduce taper relief.

Entrepreneur's lifetime relief is being extended from £2m to £5m.

These two measures highlight the importance of prudent tax-planning for clients operating through their own limited companies, and we remind our clients of our open invitation for an in-depth tax-planning review with us. We will also be happy to discuss tax planning opportunities with potential new clients.

4) Pensions

Pension relief for higher earners was due to be phased out for higher earners. For individuals with relevant income of £130,000 income also included employer contributions. The proposals received criticism for their complexity and not all the details particularly those for dealing with foreign schemes had been determined before the general election.

The Chancellor noted that the £3.5 bn revenue that was to be generated by these proposals must be protected and committed to work with industry to examine how these provisions might be simplified. The government appears to favour abolishing the current tax relief plans and going for a reduced annual allowance in the range of £30-45k. It will repeal the current measures once it has decided on its revised approach. Legislation to do this will be introduced before the summer recess.

The state pension will be linked to average earnings with a guarantee that pensions will be raised by the higher of earnings, RPI or 2.5%.

The Chancellor announced the intention to increase the state pension age to 66.

5) VAT

The standard rate of VAT has been raised to 20% with effect from 4 January 2011. Zero rated and exempt items will not be impacted. Flat Rate Scheme percentages have increased accordingly as have the thresholds of eligibility for the scheme. The flat rate percentage applicable to Computer and IT consultancy or data processing will move up from 13% to 14.5%.

6) IR 35

No changes to IR35 were announced in yesterday's Budget but it remains on the agenda, with the Budget stating, "The Government remains committed to a review of IR35 and small business tax and will release further details shortly." Any such announcement will clearly be of great interest to contractors and planIT will keep you informed as soon as any changes are announced.

7) Corporation Tax

Instead of implementing a 1% increase in the lower rate of corporation tax from 21 to 22%, there will now be a 1% reduction to 20% effective from April 2011.

If you would like any further information or advice about the changes which will affect you as a contractor from this Budget please contact us.