Budget 2024: Time for contractors to assess how they pay themselves a salary and stay tax efficient
The Chancellor, Rachel Reeves, made several changes in the budget that will have a significant impact on contractors. These are employer national insurance and umbrella company clamp downs.
Employer National Insurance
The biggest changes to be aware of relate to National Insurance (NI).
Employers’ NI will increase by 1.2% bringing it to 15%, and the secondary threshold at which contributions must be made is falling from £9,100 to £5,000.
The employment allowance, which lets a business offset NI costs against PAYE liabilities, will go up to £10,500 (from £5,000) in April next year.
At the same time the eligibility cap of £100,000 in employer NI contributions, will no longer exist. But note, that the restrictions for limited companies with a sole employee who is also a director, remain in place.
What does this mean for you as a contractor?
If you’re a contractor using a limited company to run your business, then there will be some pros and cons to the changes.
If you’re the only director-employee of the company, with a salary of £12,570, then the increase in employer NI contribution will mean you’ll pay an additional £656.64.
But it’s possible your company will be able to claim some relief now that the employment allowance has been adjusted.
There are two scenarios that this could apply:
- if your business employs someone (even if they are a director of the company too) and they earn more than the new secondary threshold then relief can be applied
- if you employ someone and the salary is between £5,000 and £9,100, then the new rules mean that the employers’ NI can be offset.
What does it mean for you as a client of inniAccounts?
For most of our clients, we expect it will be the case that the first £10,500 of employer NI is waived if they are eligible for the employment allowance. Few will be paying tax on their salaries so won’t have any PAYE liabilities to offset it against. If you’re unsure where you stand then check with your account manager.
What do you need to do?
Reassess the impact on your specific circumstances.
If you’ve been aligning salary with the secondary threshold to manage employer NI and keep things tax-efficient, then it’s very likely that it’s no longer in your best interest to keep doing so.
It’s really important to set director salaries according to the changes coming in, but also changes that are already in place, such as that related to corporation tax. It’s possible you will need to make adjustments to stay efficient.
It’s worth noting that dividend tax rates and tax-free allowances remain at their 2023/24 rates. This can form part of your future strategy.
If you need help to re-evaluate your salary plan, then speak to your account manager who can look at your specific circumstances and give you options to consider.
The impact of changes to Umbrella company rules
The manifesto pledge to improve workers’ rights played out in Labour’s first budget. Umbrella companies came under fire, with more focus on compliance. It’s something we’ve lobbied for and welcome.
At the crux of the change, recruitment agencies that supply umbrella workers, must take responsibility for PAYE payments. If an agent isn’t involved, then the end client must bear the brunt.
Note of caution: anyone working under an umbrella will likely pay more in secondary contributions, due to the fact that umbrellas will pass these costs onto the individuals working for them.
What does this mean for you, and the market?
It’s too early to say how this will affect the wider market, but it’s likely companies that need short-term highly skilled labour will rethink their hiring policy and as part of this, reconsider their position on IR35. The use of umbrella companies will be less attractive, and so being able to do business on your own, flexible, terms will be more freely available.
As such, we predict more outside IR35 contracts. This could tempt back the people who left contracting for full-time employment.
As ever, proving a tight case for outside IR35 is important. The resources inniAccounts has developed to help you assess your position and discuss it with a prospective hirer are useful references.
Capital Gains Tax and Business Asset Disposal Relief changes
For all the people who could start or return to contracting, there are of course those leaving the industry for reasons like retirement.
Those who will close their business, they should review how the changes to Capital Gains Tax (CGT) will influence the timing of the closure.
The rate has risen from 10% to 18% for basic and from 20% to 24% for higher rate tax-payers. At the same time business asset disposal relief (BADR) will change. For now, until the end of the 24/25 tax year, BADR stays at 10% but in 25/26 it will go up to 14% and then rise again to 18% in 26/27. The £1m lifetime limit stays in place.
It means that if you are going to close your business you need to look at the timing and whether you can use BADR. It’s likely voluntary liquidations for businesses with over £25,000 capital for distribution will spike as a result of this change.
Final thoughts
There are two sides to the coin.
In terms of finding work, it’s possible that the review on workers’ rights and umbrellas in particular, could open the opportunities to work with companies that put in place more pragmatic IR35 policies. That will be a positive for many people who want to operate directly and fairly.
However, financially, it’s now more important to work closely with your accountant and tax adviser to ensure you understand the implications for your own plans. Get ahead of salary and dividends so you are as tax efficient as possible and ensure your long-term plans for pensions and retirement are protected.