What contractors need to know about the Spring Budget

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The Government wants to encourage over 50s back to work but faces hurdles due to IR35 – legislation that has a significant portion of contractors thinking about quitting.

Last month, Chancellor Jeremy Hunt delivered a Spring Budget with several promising policies to support households. However, experts criticised the Chancellor for failing to deliver significant measures to support contractors and self-employed workers. 

The Chancellor’s failure to focus on the IR35 legislation and, crucially, his confirmation that Corporation Tax would increase this April, left many contractors concerned. The Government today (27 April 2023) announced a consultation on IR35, but any potential changes will be a while off.

Contractor payroll experts at Dolan Accountancy have compiled everything contractors need to know about the outcomes of the Spring Budget 2023.

Key points at a glance: No changes to IR35

The first notable takeaway from the budget is there will be no change to IR35. IR35 simply means that the contractor is subject to PAYE, and is expected to pay the correct amount of tax and national insurance that a permanent employee would have deducted from their pay cheque. Neither the IR35 legislation itself nor the off-payroll working rules were addressed during the Chancellor’s hour-long speech.

 Despite suggesting in his speech that “no one should be pushed out of the workforce for tax reasons” the chancellor failed to address the impact of the off-payroll rules. In Self-Employed Landscape 2022 research, 11% of contractors planned to retire early as a result of the introduction of IR35 reform in the private sector in 2021 and 6% planned on quitting contracting. With over 4.3 million self-employed people in the UK, reforming or repealing IR35 would encourage those workers back into employment.

Increase in corporation tax

As announced back in March 2021, the expected increase in the rate of corporation tax in April 2023 from 19% to 25% will go ahead. This means that as of April 2023, the rate will increase to 25% for companies with profits over £250,000 (around 10% of businesses in the UK). The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.

Pension tax reforms

In a bid to encourage those over 50 to return to work, the Government is introducing legislation around pensions. There were two key changes to pension tax in the Budget:

Firstly, the Lifetime Allowance charge will be removed from April 2023 before the Allowance is abolished entirely from April 2024. The aim of these reforms is to ensure that highly skilled individuals are not disincentivised from working.

The annual tax-free allowance will also increase from £40,000 to £60,000. In some cases, this amount could be higher if you have ‘carry forward’ available to you. For the self-employed and contractors, ‘carry forward’ can be a vital allowance that is particularly useful when you have income available that you have been reluctant to draw, due to increasing your tax liabilities.

The Government also announced it will increase the Money Purchase Annual Allowance from £4,000 to £10,000 and the minimum Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023. This is the amount you can put in your pension once you’ve already taken a lump sum out. This is good news for contractors who will be able to save more money into pensions.

Energy Price Guaranteed

Jeremy Hunt announced measures to help households through the cost of living crisis. The Energy Price Guarantee was extended until the end of June, giving contractors who work from home the peace of mind that the Energy Price Guarantee will stay at £2,500. He confirmed that this extension will save the average family around £160 on their energy bills and cost the Treasury around £3bn.

To further help with the cost of living crisis, Hunt announced that the planned 11p rise in fuel duty will also be cancelled, maintaining last year’s 5p cut for another twelve months, saving a typical driver another £100 on top of the £100 saved so far since last year’s cut. 

Childcare reforms

Childcare costs have been rising, making it hard to justify some parents going back into the contract workforce while their children are under school age. But in an effort to see the UK economy grow, the Chancellor has delivered more Government-subsidised childcare. Eligible working parents will be entitled to 30 hours a week of free childcare for 38 weeks a year, for children aged nine months to three years. This will be rolled out in phases from April 2024 and is in addition to the 30 hours a week already provided for eligible working parents of three-to3-four-year-olds.

The outcome for contractors

The Spring Budget 2023 announced many promising changes, including a reduction in the pension tax and policies to help reduce household costs. However, with no direct mention of the self-employed and contractors, it’s a missed opportunity to fix key IR35 issues. The Autumn Statement later this year presents the opportunity to do so.

Zeeshan Anwar is Head of Compliance at Dolan Accountancy, contractor and payroll experts.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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