With the Conservatives having full reign, Britain awaited to see what the summer budget would bring. It seems that the four-year freeze on working age benefits and the cuts to tax credits were made more palatable by the Chancellor introducing a National Living Wage.
In its desire to see a higher wage for the more experienced worker, the Government will be introducing a premium wage (otherwise known as the National Living Wage). From next April, workers aged 25 years and over will be entitled to a National Living Wage of £7.20, raising to £9.00 per hour by 2020. A significant increase it seems, but considering the fact that the current National Minimum Wage of £6.50 is due to rise to £6.70 in October, in reality workers will receive a further 50p per hour as a result of the above changes in April 2016.
That said, small firms or businesses employing a significant number of staff on the minimum wage are likely to feel this change most; it is hoped that the reduction of Corporation Tax by 1% to 19% in 2017, and then to 18% in 2018 and, the increase in the National Insurance contribution Employment Allowance from £2,000 to £3,000, will help to balance out the increase in wages. The latter, the Chancellor said, would allow small businesses to employ up to 4 people on the National Living Wage without paying any National Insurance, but we will have to wait and see whether this really will be the case.
In relation to taxation and the personal allowance, the Chancellor announced that he was increasing the tax-free personal allowance to £11,000 for 2016/17 and the higher rate tax threshold to £43,000 in 2016/17, working towards the Conservative pledge of a personal allowance of £12,500 and a higher rate threshold of £50,000 by the end of this Parliament.
Furthermore, again in line with the Conservatives pledge to create an additional three million apprenticeships by 2020, to our surprise the Chancellor announced a new a levy on large employers to help finance such apprenticeships. Mr Osborne said the levy was a radical move, but one which was long overdue. “While many firms do a brilliant job training their workforces, there are too many large companies who leave the training to others and take a free ride on the system,” he said. Some will welcome this change, however, critics argue that the new levy may guarantee funding for more apprenticeships, but it is unlikely to equate to higher quality or deliver the skills the country needs.
Finally, the Chancellor confirmed that he would be keeping up the pressure to crack down on disguised employment such as umbrella companies and personal service companies. So what does this mean for contractors and umbrella companies?
For contractors this means a change to taxation on dividends; previously there was an advantage for those operating a limited company to take dividends rather than salary (with saving of up to 12.5% on payments up to £150k). The changes in the Summer Budget mean that Dividend Tax Credit will be removed from April 2016 and a new Dividend Tax Allowance of £5,000 a year will be introduced.
Therefore, from April 2016 only the first £5,000 of dividend income will be tax-free; thereafter they will be taxed by a sliding scale starting at 7.5 per cent. For example, a dividend over £5,000 will attract 7.5% tax for basic rate taxpayers; higher rate tax payers will pay 32.5% (they currently pay 25%), and ‘additional raters’ will pay 38.1% (rather than 30.5%). Therefore, no longer will contractors be deciding the correct mix of salary and dividend from their company.
In addition, the changes outlined in the 2015 budget will restrict the ability of umbrella company contractors to claim tax relief on travel and subsistence expenses.
Previously umbrella company contractors were able to claim a limited number of expenses such as travel and equipment costs. However, under these new rules umbrella company contractors will find that their ability to claim travel and subsistence costs as tax deductible expenses is reduced. The changes to travel and subsistence expenses are scheduled to come into effect from April 2016, however the exact specifics of this change is set to become much clearer through the remainder of 2015 so watch this space!
If you have been impacted by any of the above changes, please contact Kay Kularia in our employment team for further advice – please call 020 8891 6141 or e-mail email@example.com