New tax year 2024-25 begins for contractors

The new tax year 2024-25 has started as a bit of damp squib for contractors, despite numerous changes in play for limited companies.

Part of the anti-climax appears to be down to the starting pistol for 2024-25 officially sounding at the weekend, on a Saturday.

Tax year 2023-2024 ending on a Friday didn’t help, as PSCs’ emails to accountants asking if annual ‘tax-free’ allowances got used were confined to the weekday most prone to ‘out-of-office’ auto-replies.

'Long and winding road'

But even more to blame for the contractor sector just shrugging at 2024-25 is its most positive change - the IR35 offset - coinciding with its most negative - a halving in the dividend allowance.

Even the IR35 offset, despite it being a welcome end to a “long and winding road” with HMRC (according to ICAS head of tax Justine Riccomini), is getting a muted reception.

Effective since Saturday April 6th 2024, the HMRC set-off mechanism for off-payroll working was reflected on by a dejected project lead, Jonathan Krogdahl:

“I doubt it will make a spot of difference to all of the 'blanket inside' firms.

“Their in-house lawyers and risk managers will still apply a zero-tolerance policy [to Personal Service Companies],” he said.  

'Offset isn't expected to increase outside IR35 opportunities'

Despite being called for by APSCo (“needs to be a priority”); approved by Markel (“a good thing”), and embraced by Qdos (which on Friday called it a “game-changer”), the IR35 offset isn’t exciting a contract IT recruiter either.  

“While this change might seem like a step in the right direction, unfortunately it's not expected to increase opportunities outside IR35; something contractors have been hoping for,” said the recruiter, Matt Collingwood.

After reminding that HMRC can still impose up to 100% in penalties plus interest, for non-compliance and delay, respectively, Collingwood, the boss of tech recruiters VIQU, warned:

“Once HMRC has evidence a client isn’t making accurate Status Determination Statements, there’s blood in the water.

“HMRC will be relentless, diving into the client's history, scrutinising every contractor.

“Even if the client has no further contractors with incorrect SDSs, the ensuing investigations unleash a tidal wave of stress, time, and financial strain.”

'Very little impact'

Ashley Olliver, a director at Caroola Accountancy is more supportive of the IR35 offset finally arriving, but he too thinks it won’t lead to an uplift.

“The new rules stopping double taxation are very welcome but… this [change] will likely have very little impact,” Olliver posted.

“From my experience, most end-clients and fee-payers aren’t even aware of the double-taxation rules.

“Therefore, it never factored in their decision-making in the first place when it came to their policy/stance around the off-payroll rules and IR35. So it’s unlikely to make difference to their decision-making process now.”

'Easy for me to say'

The same ‘no change’ verdict was issued to ContractorUK about the tax-free dividend allowance -- which dropped on Saturday to just £500 for 2024-25.

The accountant behind the assessment said a difference of just £43.75 a year wasn’t going to make “many” contractors alter their dividend strategy.

Worse for PSCs, the accountant said, would have been if dividend tax rates were increasing (dividend rates are staying the same as they were in 2023-24).

Personally unaffected by dividends, including the 90% reduction in the allowance since 2017-18, the accountant conceded it is “easy for me to say” that the extra £43.75 a year is too small to matter.

'Millions facing prospect of paying more in tax'

Qdos’s Seb Maley, who made the 90% calculation on Friday, believes it’s the direction of travel from the government which is the issue.

“Slashed by 90% since 2017-18, [when it was £5,000, the allowance is one way that this] government claws more money from independent shareholders and small businesses.”

Mr Maley continued: “[So ] from the start of [this] new tax year…the tax-free dividend allowance will be [half what it was in 2023-24], with millions of small business owners facing the prospect of paying more in tax, sooner, on their income.”

'Question over whether low salary plus dividends is still beneficial'

Zeeshan Anwar of tax and accounting company Dolan Accountancy, agrees that the smaller dividend allowance for 2024-25 is significant.

The accounting company’s head of compliance, Mr Anwar told ContractorUK: “There [was] no movement on corporation tax [at Spring Budget 2024], and [now] the dividend allowance has been cut.

"Many contractors -- and their accountants -- will be getting their calculators out to see whether it’s still beneficial to continue with low salary plus dividends from April [6th] 2024."

'Tax-efficient salary for limited company in 2024-25 is £12,570'

For a limited company, tax adviser Ellis Bennett has recommended a salary of £12,570 for directors with no other income source.

“This use of the personal allowance is the most tax-efficient way of taking money out of the company,” advised Bennett, founder at EA Accountancy. “Additionally, anything in excess, dividends should be taken out.”

Chartered accountant Helen Christopher is endorsing the same figure as the most tax-efficient limited company salary in 2024-25.  

“At £12,570 your limited company will pay a small amount of Employer’s NIC, around about £479,” the boss of Beansprout Consultancy calculated.
 
“So the limited company has a total cost of £13,049. But this is tax-deductible and assuming the company pays corporation tax at 25%, that's a tax saving of £3,262 and a net cost of £9,787 for the company, in order for the employee to receive £12,570.”

'Tax-deductible'

As a “bonus” tip for PSCs, Christopher said they could start paying someone as an employee, to ‘open up the opportunity for the company to contribute to an individual’s pension scheme.’

“These deductions are also tax-deductible,” she continued to directors. “[And] you don't have to employ someone full time. The same principle applies to part-time workers”.

Tom Wallace of WTT Group is similarly advising his clientele on changes to make now that 2024-25 has begun.

'Several important changes around IHT'

“As we move into the new tax year, there have been several important changes and clarifications around inheritance tax rules and procedures that executors and those handling estates need to be aware of,” Wallace started.
 
“One helpful new provision is that personal representatives can now apply to HMRC for a ‘grant on credit’ to pay any IHT due before receiving the grant of probate.

“This allows the accessing of funds in the estate without having to take out commercial loans to cover the tax bill upfront. There is a process to follow, but it can provide executors more flexibility on liquidity if needed.”

WTT Group’s head of tax investigations, Wallace added that April 6th 2024 also saw the £500 ‘de minimis’ come into effect, allowing smaller amounts of income received by trusts and estates to be exempt from tax each year.  

'Increasing child benefit payments'

From its social media page on ‘X’ (formerly Twitter), HMRC is yet to pinpoint the IHT changes since they took effect on Saturday.

But the tax department did use the first day of the new tax year to flag up the changes to National Insurance, which is reducing from 10% to 8% for employees who pay Class 1, and from 8% to 6% for the self-employed.

So far in 2024-25, HMRC’s other ‘Tweet’ to usher in the new tax year concerns child benefit -- the recipients of which will “automatically receive increasing payments,” it promised.

'Average worker to save £900 a year due to new Class 1 NI rate of 8%'

Louise Rayner of NumberMill identified the one announcement of the HMRC trio on ‘X’ which will benefit umbrella company contractors.

“Critics highlight analysis showing the government will raise £40billion by freezing personal tax thresholds for four years…[but] these [Class 1] cuts will save the average worker -- earning £35,400 -- £900 a year,” Rayner said.

With both umbrella companies and their users in mind, sales consultant Piers Spencer welcomed in the tax year on LinkedIn too.

'New ways for umbrella companies'

“In an ever-competitive market, I've noticed a recurring gap in the support provided to contractors -- pensions.

“While many umbrella companies excel in areas like portal services…and telephone support, it seems that reviewing pension schemes has been overlooked”, Spencer wrote on Friday, before sounding a half-appeal to umbrellas. “New tax year = new ways to think about better supporting your contractors.”