On Friday, 23rd September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng, laid out his mini budget in response to increasing inflation and the effects of this on the UK economy.
Alongside several announcements, including cuts to corporation tax, National Insurance, and income tax, significant and unexpected changes to IR35 were also announced, much to the interest of contractors.
In this guide, Umbrella Search takes a closer look at the 2022 mini-budget and its implications on contractors and freelancers.
Changes to IR35
One of the key headlines for contractors in the 2022 emergency budget was changes to IR35. Although unexpected, these changes have been welcomed widely by contractors.
Introduced in 2000, IR35 is a piece of legislation designed to stop contractors and self-employed individuals from working as disguised employees to benefit from tax advantages.
Initially, it was the contractor’s responsibility to decide and declare their IR35 status. However, this was changed when HMRC considered that too many contractors were wrongly reporting their status.
It then became the end-client’s responsibility to determine the contractor’s IR35 status. This responsibility became mandatory in the public sector in 2017 and the private sector in 2021.
Under these rules, thousands of contractors have had their IR35 status wrongly declared and have paid more in tax and National Insurance as a consequence.
In the Chancellor’s surprise U-Turn, a reversal was announced, meaning that contractors once again regain control over determining their IR35 status. The decision is a welcome relief to contractors across the country and is set to take effect on 6th April 2023.
It is expected that this will also remove the burden on small-medium businesses encouraging more companies to work with and utilise the services of contractors.
Changes to National Insurance
Another key announcement in the 2022 mini-budget was the reversal of former Chancellor Rishi Sunak's increase in National Insurance contributions.
Under the new plans, the Chancellor scrapped recently introduced NI thresholds, meaning National Insurance will be cut from 13.25% down to 12% on income over £12,570 per year.
The decision will impact thousands of contractors meaning many will take home more each month. The government estimates that around 28 million workers across the UK will keep an additional £330 a year from their pay packet.
Dividend tax increase scrapped
The Chancellor also announced his plan to reverse the recent 1.25% increase in dividend tax. This means that the ordinary dividend tax rate will return to 7.5% from 8.75%, reducing the upper dividend rate to 32.5% from 33.75%. The additional rate will be abolished as of 6th April 2023.
Again, this will impact thousands of contractors, many of whom operate through their own limited companies and pay themselves through several channels, including dividends. It is forecast to make 2.6 million workers across the UK who pay themselves through dividends better off by £345 per year.
Income tax cuts
Another cut introduced by the Chancellor was to income tax. The basic income tax rate for workers in England, Wales, and Northern Ireland has been cut from 20% to 19% for those earning between £12,571 - £50,270. Again, this is set to come into effect on 6th April 2023.
So, suppose you are a contractor working as an employee through your own limited company. In that case, this spells good news, increasing the amount you will take home at the end of each month.
Although it was initially announced that the top income tax rate would be abolished for those earning over £150,000 per year, the government has since made a U-Turn.
Corporation tax increase cancelled
Under former Chancellor Rishi Sunak, a planned increase to Corporation tax was set to come into action from April 2023, under which rates would rise from 19% to 25%.
In another reversal, the new Chancellor has announced scrapping this rise.
This is welcome news to contractors who operate through their own companies who would have otherwise faced the 6% increase in corporation tax if their company profits exceeded £50,000.
Cuts to stamp duty
Another key announcement in the 2022 mini budget included Stamp Duty Land Tax changes.
Previously, no stamp duty was paid on the first £125,000 on the purchase of a property.
However, under planned changes, the Chancellor has announced that this threshold will increase to £250,000. Furthermore, for first-time buyers, the threshold will rise from £300,000 to £425,000, with the maximum amount that an individual can pay while being eligible for the First Time Buyer's Relief being increased to £625,000.
Again, this brings welcome news to contractors looking to buy their first property or a new home, saving them significant sums of money.
These changes are already in motion as of 23rd September and are applicable only in England and Northern Ireland.
Overall, although the markets and economists have not reacted well to the emergency budget, it is fair to say that many of the policies laid out are set to be beneficial for contractors.
For this reason, many may be considering contracting in the future. If this is the case, Umbrella Search is here to help.
Take the following steps with Umbrella Search
Umbrella Search is here to make things easy for contractors. Whether you have experience in contracting or are brand new to it, our friendly and professional team does its best to get to know your circumstances to provide the best recommendations for umbrella providers.
We partner with an extensive list of umbrella companies, only ever working with umbrella providers that have undergone thorough compliance and service checks before joining us. You can be sure that you can find a reputable umbrella company you can trust.
To take the first steps to find an umbrella company that's just right for you, why not get in touch with Umbrella Search today and let us do the hard work for you?
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