From April 2020, hundreds of thousands of private-sector contractors face higher tax and National Insurance (NI) bills.
This week, the chancellor Philip Hammond announced that tighter tax rules for those working in the public sector will be extended to those working for private firms. This crackdown is the biggest revenue-raising measure in this year’s Budget.
Among those affected by these tighter rules will be IT contractors, engineers and consultants.
How will the new rules work?
The rules, known as IR35, are designed to hit those deemed by HM Revenue and Customs (HMRC) to be employees. For IR35 to apply, you have to work through your own company for another business. If the way you work is similar to an employee of that business, you should pay income tax, and National Insurance (NI) at the 12% rate.
Up to now many contractors in personal service companies have been paying less tax and NI. But from April 2020, larger businesses – like banks – will be responsible for deciding which contractors will need to pay more tax and NI. The rule change will not apply to the smallest 1.5 million businesses in the UK.
If someone is deemed to be an employee, the firm using the contractor will also have to pay NI for the first time. If classified as an employee for tax purposes, they would have to pay income tax, and NI at 12% on the money paid for their work. However they may not have other employee rights, like maternity leave.
Critics have accused the chancellor of hurting thousands of people who are self-employed, and burdening businesses too. However, the Treasury has insisted that the reforms will not impact anyone who is genuinely self-employed.
What are the benefits of these new rules?
The Treasury estimates that the changes will bring in an extra £2.9bn by 2024.
When similar changes were brought in to the public sector last year, the HMRC raised an extra £550m in tax and NI.
If you’re currently a contractor working within the IT and Cyber Security industry, or you’re considering making the transition between permanent and contractor work, please get in touch with the VIQU team.