What Budget 2016 Means for Contractors


Chancellor, George Osborne’s proposal for the eighth budget has been hailed as one that will go a long way in maintaining and sustaining a strong economy but it also foretold repercussions for the nation’s workforce, not all of them good. However, contractors were wary after they head Osborne wax eloquent on the benefits of Off Payroll Employees in the work sector.

Starting from April 2017, public sectors and institutions will be responsible for enforcing tax regulations for contractors or off payroll workers via limited companies based in the former. The budget document states, “from April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools.”

It seems as if the government is focusing once again on the public sector along with recruitment businesses that place contractors and freelancers. According to a document detailing the reformation of the intermediaries legislation, from April 2017, contractors will not have the privilege of deciding if the IR35 applies to them; the business that they hired to work for through their limited company – the client or the agency itself – will decide this.

In addition, the client or the agency the contractor is working for will also need to deduct tax on all the payments that are made to a contractor if in their view the contractor falls within IR35. If it is implemented, this move will make limited companies liable to taxes that they may or may not be able to afford. It might also limit the take home pay of their contractors from April of this year and onwards, however as limited company employees, if they continue to manage their IR35 status, their profession will still be considered as one of the most tax efficient ways to work. On the other hand, umbrella company employees who work under the supervision of clients will no longer be eligible to claim tax relief on expenditures from April of this year and onwards.

The absolute cherry on top is that despite appeals to veto it, the new dividend tax rate was announced into effect just last year. From April 16, the 10% tax credit on dividends will be abolished. There will be £5000 tax free dividend allowance. Dividends above this level will be taxed at 7.5% (basic rate) and 32.5% (higher rate) and 38.1% (additional rate). However, dividends received by pensions and ISAs will be unaffected. From 6th of April 2016, individuals who are receiving more than £5000 in dividends will have to submit personal tax return.

However, there is some good news for contractors amidst all the negativity. Despite the adverse circumstances that the proposed changes might result in for public sector contractors, they are also going to be privy to some positive changes brought about by it. Personal allowance will be increased to £11,000 in 2016/17 and £11,500 for 2017/18. In addition, large scale industrial and infrastructure projects will also continue to gain investment and the corporate tax rate is also going to be reduced by 3% come 2020.


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Shams Urrehman
MD Accounts Direct

Hi, I'm Shams Urrehman, Qualified accountant since 2005 and Director at Accounts Direct Ltd since 2009. I have been advising freelancers, management consultancies, IT contractors, SME’s and other businesses about accounts and tax planning.