In what was touted as his ‘Bounce back Budget’, chancellor Rishi Sunak focused on supporting businesses and jobs during the pandemic and the UK’s long-term economic recovery. The Budget extended the two major income support schemes, alongside extensions of universal credit, tax credits and stamp duty. A big tax freeze saw no change to income tax, national insurance or VAT, and there was also support for business including restart grants, an extension of business rate relief and reduced VAT rates for the hospitality sector.
Stressing the need to be realistic, the chancellor pulled no punches. He acknowledged that the economy shrank by 10% in 2020, while 700,000 people have lost their jobs and borrowing has reached £355bn – a record figure in peacetime. Despite this, the chancellor said that the measures put in place are working, and there was every reason to be optimistic. The economy is set to rebound in 2021, with OBR figures predicting a return to pre covid levels by the middle of 2022. Thanks to the job support schemes, unemployment is predicted to peak at 6.5 next year, rather than the 11.9 previously forecast.
While the Budget focused on the present situation, Sunak also looked at longer-term measures to help strengthen the economy post crisis and give the country a competitive edge. A series of initiatives were announced to attract global investment and talent, including a tax ‘super deduction’ for businesses investing in productivity-boosting assets, a freeport system to encourage trade, and a new ‘elite’ visa to attract the highly qualified. No doubt the chancellor hopes this will see the UK spearheading new growth areas such as green energy in preparation for the COP26 conference on climate change in November.
How will the Budget Affect Contractors?
Most noticeable in its omission from the chancellor’s speech was any reference to the April IR35 reform. This effectively puts an end to any hope of a last-minute U-turn and acts as a clear signal that the reform will go ahead as planned. With less than one month to go, contractors should speak to their agencies and end clients about any changes to their contract and employment status. Where clients are adopting a risk-averse approach, contractors can use an umbrella company payroll to ensure they are protected from any disruption to their work.
Reassuringly, there were no raises to Income Tax, National Insurance, Annual Exemption for Capital Gains Tax, the VAT registration threshold, Inheritance Tax limit and VAT rates. Although contractors with profits over £50,000 will be caught by the Corporation Tax increase due in 2023, from 19% to 25%, many contractors can mitigate their tax liability through pension contributions etc.
It’s also reassuring for contractors that no changes were made to Business Asset Disposal Relief (Entrepreneurs Relief). This means that contractors wishing to close their limited companies by voluntary liquidation will still be paying tax at a rate of 10% on the assets and cash on closure. This could benefit many contractors who are closing their limited companies and switching to an umbrella payroll in preparation for IR35 reform.
Fortunately, there was no news of plans to review taxation of the self-employed. The idea of a review was raised within the House of Commons Treasury Committee’s ‘Tax after coronavirus’ report. This caused considerable apprehension amongst contractors, who will already have to deal with IR35 reform on top of what’s been a gruelling year with little access to government financial support. The Budget at least saw new starters, who were previously unable to claim SEISS, made eligible for grants, providing they completed a tax return for 2019/2020. This should bring a further 600,000 people into the support scheme.
Criticism of the Budget
Criticism of the Budget focused on the perceived short-term gain that would lead to longer-term pain and increased social inequality. While the chancellor took action to restrain the growth in debt over the next five years, he did not fully address how he plans to deliver sustainable public finances into the future. Referring to the ‘bounce back’ forecast for next year, Alison Ring of ICAEW said: “While the deficit for the current financial year will come in £39bn below what was previously expected, this is forecast to be offset by an increase to the deficit of £70bn in 2021-22.
While Sunak waxed lyrical on “well-paid green jobs” and “exporting incredible new products”, health experts said the failure to give the NHS any extra cash, except £1.65bn for the vaccine rollout, would leave it struggling to cope with the pandemic’s legacy. Despite promising to be “open and honest”, buried in the small print of Sunak’s Budget is a £30.1bn cut to frontline NHS services that will increase pressure on key workers who are yet to be adequately rewarded for their service. Meanwhile, the temporary uplift in universal credit is expected to plunge many into poverty when it comes to an end next winter.
Given the need to pay for the cost of the pandemic, it came as no surprise that the chancellor didn’t budge on IR35 reform. The government is expecting to raise up to £2.9billion by 2024 from the reforms. However, those representing the contracting and freelance sector have pointed out the likely short-sightedness of IR35 reform when it comes to building financial stability.
The IPSE, which has continued to campaign against the reform, commented: “Pressing ahead with making it harder than before for big business to hire flexible workers due to the poorly understood, and poorly implemented off-payroll rules, while we start to recuperate from covid, and in the context of a newly independent UK after Brexit, will still seem like folly to many.”
There was also considerable disappointment that no support scheme was announced for limited company directors, despite persistent lobbying. Asked why he’d chosen to abandon limited co directors, the chancellor cited concessions such as Universal Credit, bounce-back loans and furlough for their PAYE income, adding that despite the proposals put forward, “there just isn’t a workable option.”
Here’s a summary of the Budget’s main points:
- No changes to rates of income tax, national insurance or VAT
- National minimum wage will increase to £8.91 an hour
- Tax-free personal allowance to be frozen at £12,570 from April 2021 levels to 2026.
- Higher rate income tax threshold to be frozen at £50,270 from April 2021 levels to 2026
- Stamp duty holiday on house purchases in England and Northern Ireland extended to 30 June, meaning no tax charged on sales of less than £500,000
- Inheritance tax thresholds, pensions life time allowances and annual capital gains tax exemptions to be frozen at 2020-2021 levels until 2025-26
- Corporation tax on company profits above £250,000 to rise from 19% to 25% in April 2023. Rate to be kept at 19% for about 1.5 million smaller companies with profits of less than £50,000
- Tax breaks for firms to “unlock” £20bn worth of business investment
- Firms will be able “deduct” investment costs from tax bills, reducing taxable profits by 130%
- Incentives for firms to take on apprentices to rise to £3,000 and £126m for traineeships
- Lower VAT rate for hospitality firms to be maintained at 5% rate until September, interim 12.5% rate will then apply for the following six months
- Business rates holiday for firms in England to continue until June with 75% discount after that
- £1.65bn to support the UK’s vaccination rollout and £50m to boost the UK’s vaccine testing capability
- New UK Infrastructure Bank to be set up in Leeds with £12bn in capital, with aim of funding £40bn worth of public and private projects
- £15bn in green bonds, including for retail investors, to help finance the transition to net zero by 2050
- £150m for community groups to take over pubs at risk of closure
- First eight sites announced for freeports in England – areas with little to no tax in order to boost economic activity.
- All alcohol duties to be frozen for second year running
- Fuel duty to be frozen for eleventh consecutive year
Full details of the Budget 2021 will be released by the Treasury on the 23rd March.
Contractors and Recruitment Agencies need to act now to ensure that they are protected from the fallout of reform. Amaze’s Umbrella service has undergone rigorous assessment to attain FCSA accreditation, giving you a fully compliant IR35 solution. Our service also offers benefits of employment that permanent staff receive as well as Perkbox* benefits, insurance cover and a seamless onboarding experience from our first-class customer service team. To speak to a member of the Amaze team see here.
*Perkbox services are available to contractors paying the qualifying service fee. Please contact us for information.