Budget 2014 impact on contractors and small businesses

On Wednesday George Osborne delivered his 2014 budget. The biggest gainers were savers and pensioners, and by far the biggest losers are those using elaborate tax avoidance schemes. For the most part, contractors and small business owners will benefit from the budget announcement.

Personal tax

The 2014 budget brings good news to most individuals: tax thresholds are increasing, child care relief is more generous than expected and there’s more flexibility for your savings and pension pot.

  • From 6th April 2014 the amount you can earn without paying tax has increased £560 to £10,000. The point at which you start paying higher rate tax has increased £415 to £41,865 (including your tax-free allowance).
  • Plus, from 6th April 2015 your tax-free allowance will increase to £10,500 and the starting point for higher rate tax will rise to £42,285.
  • From April 2015, it will be possible to transfer up to 10% of your personal allowance to a spouse or civil partner, provided neither you or your partner pays higher or additional rate tax. This is beneficial if one person earns less than their personal allowance.
  • From Autumn 2015, 20% relief will be offered on child care costs for children under the age of 12, up to a maximum of £10,000 per child. All parents must earn between £2,600 and £150,000.
  • ISAs will be re-launched as New ISA (NISA) in July. NISAs are more generous and flexible, with a £15,000 investment limit and the full amount can be held in cash. It will also be possible to transfer stocks and shares to cash. Existing ISAs will be converted to NISAs automatically.
  • If your non-savings income (i.e. salary, dividends, etc) is below £15,000 then from 6th April up to the the first £15,000 of earnings from your savings will be tax free.
  • There have been significant changes to pension rules, most notably from 2015 it will be possible to draw down your entire pension fund upon retirement. The first 25% will be free of tax, and the remainder will be taxed as income in that year. The requirement to purchase an annuity will be optional.

Business & employment tax

There are a number of benefits for small businesses, and those with employees are likely to benefit the most:

  • The corporation tax rate for small businesses (those with profits of less than £300k) remains unchanged at 20%
  • From April 2014 the threshold for beneficial loans (such as director’s loans) will double to £10,000. This means as long as the balance of your loan does not exceed £10,000 you will not be required to notify HMRC (via a P11D return).
  • As previously reported, from April 6th a £2,000 National Insurance employment allowance will be available, allowing you to reduce your Employer’s National Insurance payments.
  • From April 2015, Employer’s National Insurance payments will no longer be payable for employees under the age of 21.
  • However, from October 2014 late filing penalties will be payable by employers who fail to submit their PAYE RTI submissions on time.

Tax avoidance

Contractors who are using limited companies are for the most part unscathed by this budget, with no mention of IR35. However, those contractors who choose to use tax avoidance schemes (which can be recognised by advertising take home rates of 90%+) will be burdened with worry as a result of the Chancellor’s 2014 budget.

HMRC have been granted three new draconian powers, aimed directly at those using tax avoidance schemes:

  1. If any member of a tax avoidance scheme is successfully challenged by HMRC, all other users of the same scheme will automatically be judged to be avoiding tax.
  2. HMRC’s new ‘pay up first’ tax avoidance rule means that anyone in dispute with HMRC will have to pay their tax liability first, then challenge it later.
  3. Finally, HMRC will be able to recover tax debts directly from the taxpayer’s bank account, leaving tax avoidance scheme users nowhere to hide.

This means that should HMRC successfully win a tax avoidance challenge against one scheme user, they will be able to directly collect tax revenues from the bank accounts of all other scheme users within 90 days. The treasury expects HMRC to net £4.3bn using this approach over the next five years.

With this clamp down on tax avoidance schemes and the volatility of umbrella companies, using a limited company for contracting is by far the safest option for contractors, even for those operating inside IR35.