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The Osborne Effect – How George’s 2016 Budget Affects IT Contractors

Posted on 21/03/2016 by

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                                osborne-img


Last week, on the 16th of March George Osborne announced his 2016 budget. In an era of unprecedented change, this budget is more relevant than ever for IT contractors. Here are the bites that contractors need to know about..

Pros:

  1. Every contractor’s personal tax-free allowance will to rise from 10,600 to £11,000 (pre-announced). From April 2017, it will rise again to £11,500. Therefore, the blow will be softened for those heavily affected by the dividend hike.
  2. A further reduction on corporation Tax, from 20% down to 17% by April 2020.
  3. Capital gains tax will be cut, from 28% and 18% to 20% and 10% (higher rate and basic rate) from April 6th 2016.
  4. From April 2018, Class 2 NICs will be completely abolished benefitting many contractors; Self-employed and sole traders.
  5. The higher Rate income tax threshold will rise to £45,000 from April 2017.
  6. Two new tax-free allowances worth £1,000 will be introduced for micro-entrepreneurs.


Cons:

  1. The dividend tax hike that was proposed in the summer last year is still set to come into play as of April 2016. For more information try this detailed guide.
  2. The travel and sustenance restrictions also announced last year will also come into effect on April 2016. However only for Umbrella company workers in scope of IR35. So those contractors who “Opt in” might want to reassess this decision.
  3. Mr Osborne specifically addressed cracking down on public sector contractors in the speech itself. From April 2017 the government will make public sector bodies, consultancies 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. This crackdown on long term contractors is expected to bring in an extra 12 billion in tax revenue by 2020.
  4. To deter company owners from usingdirectors’ loans or advances to mitigate against this dividend tax hike, the loans to participators tax rate will also be increased from 25% to 32.5% from April 2016.


Now that the dust has settled from the chancellors red book of punishment, the overall feeling in the contractor community is pessimistic. The points look fairly balanced but it’s accepted the average IT contractor will be worse off due to the significant dividend tax hike. If you’re an IT contractor in the public sector there’s cause for serious concern but you can put your serious concern to one side until 2017 when the changes come in. With that in mind perhaps Private sector contractors should be breathing a sigh of relief.  Please find Mr Osborne’s full report here