If you're an individual working as a subcontractor and operating outside of IR35 (i.e., you're considered self-employed and not an employee for tax purposes), the Autumn Budget 2024 includes several provisions that could impact your tax position, business structure, and overall financial planning.
Here’s a breakdown of the key provisions relevant to you:
1. IR35 and Off-Payroll Working
IR35 Status Remains: The key point for subcontractors is maintaining your status outside IR35. For those operating outside IR35, you continue to be treated as a self-employed individual rather than an employee, meaning you can benefit from the usual tax advantages of being self-employed (e.g., claiming allowable business expenses).
IR35 Reforms and Enforcement: The government has maintained the IR35 rules that came into effect in April 2021, which shift the responsibility for determining IR35 status onto the hiring company (public or large private sector). However, if you’re working outside of IR35 and it’s clear that your contract does not resemble an employment relationship, you should continue to operate as a self-employed contractor with the ability to pay yourself via dividends and salary from your limited company.
HMRC Compliance: It's important to ensure that your contractual arrangements and working practices are genuinely outside IR35. Be prepared for HMRC reviews of your working practices, especially if you have multiple clients. If HMRC determines you should be inside IR35, you would face higher taxes (equivalent to income tax and National Insurance contributions as an employee), which can significantly impact your earnings.
2. Income Tax and Self-Employment
Tax Rates: As a subcontractor operating outside IR35 (presumably through your own limited company), you pay tax on your salary and dividends.
Salary: Your salary will be subject to income tax and National Insurance (Class 1 NICs). The tax bands for 2024/25 are:
Personal allowance: Up to £12,570 (tax-free)
Basic rate: 20% on income between £12,570 and £50,270
Higher rate: 40% on income between £50,270 and £150,000
Additional rate: 45% on income over £150,000
Dividends: You can take the remaining income from your limited company as dividends. The tax-free dividend allowance remains at £1,000 for the 2024/25 tax year, after which dividends are taxed at:
8.75% for basic rate taxpayers
33.75% for higher rate taxpayers
39.35% for additional rate taxpayers
The combination of salary and dividends typically allows contractors to minimize their tax liabilities compared to taking all income as salary (which would incur higher National Insurance and income tax).
3. National Insurance Contributions (NICs)
Class 2 NICs: As a self-employed individual (outside IR35), you will pay Class 2 NICs if your profits exceed the small profits threshold (currently £12,570). Class 2 NICs are currently £3.45 per week and provide access to state benefits like the state pension.
Class 4 NICs: Additionally, if your profits exceed £12,570, you’ll also pay Class 4 NICs on profits between £12,570 and £50,270 at 9%, and 2% on profits over £50,270.
However, if you're operating through a limited company, you may choose to pay yourself a modest salary (enough to meet the NICs threshold) and extract the remainder of your income as dividends, which are not subject to NICs.
4. Expenses and Deductions
As a self-employed contractor outside of IR35, you can deduct allowable business expenses from your income before tax. Some common deductible expenses include:
Office costs (e.g., rent, utilities, office supplies)
Travel and subsistence (e.g., train tickets, meals while traveling for business)
Professional fees (e.g., accountancy, legal costs)
Training and development directly related to your work
Equipment and software (e.g., computer, phone, software subscriptions)
However, it’s important to ensure that any expense claimed is wholly and exclusively for business purposes and that proper records are kept in case of an audit.
5. Dividend Tax and the £1,000 Allowance
Dividend Tax: As mentioned, the £1,000 dividend tax allowance remains in place. After this, dividends are taxed at the following rates:
8.75% (basic rate)
33.75% (higher rate)
39.35% (additional rate)
This means that you can receive £1,000 in dividend income without incurring any tax, which is particularly useful for contractors taking dividends from their limited company.
6. Pension Contributions
As a self-employed individual (outside of IR35), you can make tax-deductible pension contributions through your limited company, reducing the company’s taxable profits.
Contributions to a pension scheme can be made directly from your limited company, and these contributions are generally deductible for tax purposes.
The contribution limits depend on your earnings and the annual allowance, which for the 2024/25 tax year is £60,000. Contributions exceeding this amount may be subject to additional tax charges.
This is a great way to save for retirement while reducing your taxable income in the short term.
7. Full Expensing for Capital Investments
The full expensing scheme has been extended for capital investments, meaning you can deduct 100% of the cost of qualifying assets (e.g., computer equipment, machinery, vehicles) in the year of purchase.
If you are purchasing business-related assets, such as a new laptop or software for your work, this can be an excellent opportunity to reduce your taxable profits and, consequently, your corporation tax bill.
8. Tax Relief on Business Losses
If your limited company makes a loss in a tax year, you can carry forward that loss to offset future profits, reducing your future tax bills.
Alternatively, losses can be carried back and offset against previous years’ profits, potentially resulting in a tax refund.
This can be particularly useful if you experience periods of low income or high expenses in a given tax year.
9. Self-Assessment and Filing
As a self-employed contractor, you’ll be required to file a Self-Assessment tax return annually. It’s important to ensure that your income and expenses are accurately reported, including any income taken via dividends from your limited company.
Ensure that your accounts are in order throughout the year, especially if you have multiple contracts or clients, as this will help simplify your filing process and ensure you're not paying more tax than necessary.
10. Additional Support for Contractors
While the Budget did not introduce significant changes specifically for self-employed subcontractors, there are ongoing initiatives designed to support small businesses and self-employed individuals, including:
Support for self-employment through the Self-Employment Income Support Scheme (SEISS) (although currently inactive, keep an eye out for future schemes in response to economic crises).
NICs incentives for small employers, though this mainly affects companies with staff, it’s worth noting if you employ anyone as a subcontractor or assistant.
Summary of Key Takeaways for Subcontractors Outside IR35:
Income Tax and Dividends: You pay income tax on your salary (personal income tax bands) and dividends (with a £1,000 tax-free allowance), with dividends taxed at 8.75%, 33.75%, or 39.35% depending on your total income.
National Insurance Contributions (NICs): You’ll pay Class 2 and Class 4 NICs on your profits, but dividends are not subject to NICs.
Full Expensing: The extension of full expensing means you can deduct 100% of the cost of capital assets (such as office equipment and software) in the year of purchase, reducing your taxable income.
Pension Contributions: You can contribute to your pension through your company, reducing your taxable income and benefiting from tax relief.
Self-Assessment: You will need to file your Self-Assessment tax return annually and keep accurate records of your income and expenses.
In short, as a subcontractor working outside IR35, you benefit from the flexibility of being self-employed with a limited company, including tax advantages on dividends, the ability to deduct business expenses, and opportunities to reduce tax liabilities through pension contributions and full expensing. Just be sure to maintain clear contracts and working practices to stay compliant with IR35 rules.
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