The changes introduced in the 2018 Autumn Budget mean that many contractors could be almost £1,000 better off under the new tax rules.
We have had many queries from our contractor client about what the Autumn 2018 Budget really means for them. So, we thought it might be useful to take a moment to highlight the areas which we think will impact you the most, and try to explain them in plain English.
Changes to Personal Allowance and Higher Rate Tax Band
This measure increases the Personal Allowance to £12,500 for 2019/20 and 2020/21. The basic rate limit will be increased to £37,500 for 2019/20. Which means that the higher rate threshold will be £50,000 in 2019/20.
From 2021/22 onwards, the Personal Allowance and basic rate limit will increase in line with the Consumer Price Index (CPI).
Changes to the basic rate limit, and higher rate threshold, will apply to non-savings, non-dividend income in England, Wales and Northern Ireland, and to savings and dividend income in the UK.
See the table below for projections beyond 2021:
|2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023||2023 to 2024|
|Personal Allowance (PA)||£11,850||£12,500||£12,500||£12,760||£13,030||£13,310|
|Basic Rate Limit (BRL)||£34,500||£37,500||£37,500||£38,300||£39,200||£40,100|
No further changes to thresholds relating to National Insurance Contributions have been announced.
No changes to Corporation Taxation or the taxation of Dividends were announced.
This means that, if you are a contractor with no other source of taxable income and are paying yourself by the most tax effective method of low salary and higher dividend, you will be taxed on your earnings as follows from 2019/20:
You will be able to draw the first £14,500 of income from your company without paying any personal income tax as a combination of salary and dividend.
If you are in a position to maximise your basic rate band, you will then be able to draw a further £35,500 at the dividend tax rate of 7.5%, resulting in income tax of £2,662.50 to be able to take £50,000 of income. Previously this level of drawings would have pushed you into higher rate and cost you £3,623.75 in income tax. In short this Budget will leave you almost £1,000 better off from 2019/20.
We must of course remember that dividends are only distributable on profits AFTER corporation tax has been paid, so you would need in the region of a minimum of £51,500 of net profit before tax to be able to take this level of dividends.
The second big area to impact on our contractor clients, and the area about which we are getting the most questions is unsurprisingly concerning Off Payroll Working in the Private Sector – IR35. While the changes announced in the budget are actually relatively straightforward we felt that the subject needs to be addressed and commented on in full, so please click the link below for further information if this is a topic which is of interest to you.
As always, we are happy to answer any questions you may have, and can be contacted by all the usual channels here: CONTACT US