What 2016 has in store for limited company contractors

It might be only a week old today, but this year promises to be another eventful 12 months for limited company contractors, writes Shaun Critchley, joint managing director at contractor accountancy firm ADVANCE.

From tax legislation changes to the continued rise of ‘super-contractors’ able to command a premium for their specialist services, there are plenty of developments on the horizon for personal service company (PSC) owners.

Here are five themes that are likely to dominate the professional freelancing and contracting landscape during the next 12 months.

Dividend tax changes

April 2016 will see changes to headline rates of dividend tax and the introduction of a new tax-free dividend allowance of £5,000. Dividends income over £5,000 will be taxed at either 7.5%, 32.5% or 38.1%.

There has been much speculation over the impact these changes will have on contractors. We’ve crunched the numbers and believe that, while some PSC owners will be marginally worse off, the overall impact will not be as significant as some commentators originally feared.

Working through a limited company will still be easily the most tax-efficient set-up model for contractors. Nevertheless, contractors (and their advisers) will need to be up to speed with the changes.

IR35

We’re expecting the government to publish a consultation document on IR35 early in the New Year. This will set out HMRC’s thinking on the Intermediaries legislation, including whether liability will be transferred to recruitment firms and / or contractors’ end clients or remain with contractors.

It should also provide clarity on whether Supervision, Direction or Control (SDC) will become the key IR35 test as it will soon be for travel and subsistence (T&S). There was silence on IR35 during the Autumn Statement and in the Finance Bill 2016, so it now seems certain that the ‘new IR35’ won’t take effect until 2017. Nevertheless, we will soon know more about the government’s thinking on IR35, enabling contractors and their advisors to gauge the ‘direction of travel’ on this taxing piece of legislation.

For the time being PSCs can at least take comfort from the fact that the forthcoming T&S restrictions will only apply when an assignment falls within IR35.

Employment Allowance

The Employment Allowance – under which employers can reduce the amount of National Insurance Contributions (NICs) they pay for their employees by up to £2,000 – will be withdrawn for companies where the director is the sole employee from April 2016.

Consequently, many contractor limited companies will no longer be eligible to claim the allowance. Under the original rules if you paid yourself any salary and paid any employers’ NIC on that salary you could claim the allowance, unless you were caught by IR35 or the Managed Service Companies (MSC) legislation.

Rise of the super-contractor

It has always paid to have a niche as a contractor, particularly if your expertise lies in a field where skill shortages exist. The law of supply and demand means recruiters and their clients are willing to pay a premium for rare and in-demand skills and qualifications.

We expect this trend to accelerate in 2016, leading to the creation of a two-tier contractor pay league. Super-contractors specialising in hot areas such as cybersecurity, Agile, mobile and customer journey mapping will pocket five-figure day rates, creating a clear gap between themselves and the rest of the UK’s contractor population.

Charm offensive by contractor accountants

PSC owners look set to benefit from fierce competition between accountants, insurers and other advisors specialising in the contractor and freelancer market.

Legislative changes affecting umbrella contractors and self-employed (sole trader) professionals mean that, more than ever, limited company contractors are the clients that accountancy firms are particularly keen to attract. Be sure to shop around as there is likely to be a steady stream of promotions and offers.

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