As Chancellor Rishi Sunak unveiled his 2021 Budget on 3rd March, many contractors will be eager to know how measures announced will impact them.

Whether you operate through an umbrella company or on a self-employed basis through a limited company, there were key points laid out in the Budget that impact contractors of all kinds.

In this guide, Umbrella Broker explains everything that contractors need to know about the 2021 budget, from IR35 to support for those impacted by the pandemic.

Budget 2021: Impact on self-employed contractors

There are over 170,000 contractors operating on a self-employed basis in the UK. Many of these contractors are set to be badly impacted by changes to IR35 legislation that were initially set to come into force from April 2020 but were delayed due to the COVID-19 pandemic until April 2021.

However, as the effects of the pandemic continue to be felt by many of the self-employed, contractors had hoped that further postponement of the legislation would be announced in the 2021 Budget.

However, the Chancellor failed to mention IR35, meaning changes will go ahead as planned.

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How will this impact contractors?

IR35 was introduced by the government to stop workers such as contractors from working as disguised employees. Essentially, the legislation was implemented to stop these individuals from enjoying the tax benefits of the self-employed by taxing them at a rate similar to employees. 

IR35 originally came into action in 2000. When it was introduced, it was the responsibility of the contractor to determine and declare their own IR35 status. 

This changed when HMRC stated that too many companies were not compliant and from 2017, in the public sector, it instead became the responsibility of the client to decide the contractor’s IR35 status. 

From April 2021, these rules will also be rolled out to the private sector. From this point, it will become the responsibility of the end-client, introducing a new tax burden on any client that decides to work with contractors.

If a client decides that the contractor is inside IR35, they will be taxed before their fee is paid to them, just as if they were an employee.

Although the contractor will be forced to pay tax like an employee, they will still be considered self-employed and therefore will not receive employment benefits such as statutory rights. These include things like holiday pay, sick pay, a workplace pension and maternity and paternity leave.

For this reason, IR35 reforms are set to badly impact thousands of self-employed contractors, with some large firms planning to stop working with contractors altogether, meaning the news of no mention of IR35 in the 2021 Budget will not be welcomed by many limited company contractors.

Extension of the Self-Employment Income Support Scheme

There is some good news for self-employed contractors however, as the Chancellor announced that support for the self-employed will be extended until the end of September 2021.

The government introduced its Self-Employment Income Support Scheme at the start of the pandemic and has since extended the scheme several times. This was introduced to help those who work for themselves and have been badly impacted by the pandemic.

How will this impact contractors?

Any self-employed contractor that has experienced a genuine loss of income due to the pandemic can now apply for a fourth grant under which they will receive 80% of their average monthly trading profits which will paid out in a single instalment covering 3 months’ worth of profits with a limit of £7,500.

What’s more, for any contractors that are new to the world of self-employment, the government has also announced that the scheme will be extended to an additional 600,000 people who were not eligible for the first three grants.

The government is now letting workers submit their 2018-2019 and 2019-2020 self-assessment tax returns as evidence of their earnings, rather than only accepting 2018-2019 tax returns as it did with the first three grants which meant thousands of newly self-employed people did not qualify for support.

This is great news if you are a new contractor that has found themselves at a loss due to the pandemic but have previously slipped through the net.

Budget 2021: Impact on umbrella contractors

Likewise, there is more good news for any umbrella contractors whose work has been badly impacted by the pandemic as Sunak announced that the furlough scheme would be further extended until the end of September 2021.

The government’s Job Retention Scheme was first introduced in March 2020 to help employees that could no longer maintain their workforce because they have been badly impacted by coronavirus.

This scheme offers a grant to the employer that covers 80% of the employees’ monthly wage up to a maximum of £2,500 per month.

How will this impact contractors?

Many umbrella company contractors have been eligible to receive furlough pay because of the fact that they are employees of the umbrella company who pay tax through the PAYE system.

This means that if your work has continued to be badly impacted by the pandemic, further support will be available to you until September.

Changes to income tax

The Chancellor also announced changes to income tax rates in the 2021 budget which might impact umbrella company contractors in years to come.

Sunak announced that income tax thresholds would rise by 0.5%.

This means the basic rate threshold would rise from £12,5000 to £12,570 and the higher ate threshold would also increase from £50,001 to £50,270. What’s more, these thresholds will remain the same until 2026.

What does this mean for contractors?

Although this means you can earn slightly more without paying income tax, as the thresholds are set to be frozen for 5 years, many umbrella contractors might find that they will begin to pay more in income tax if their wages increase over this period.

Let Umbrella Broker help with what comes next

If you are a limited company contractor looking to make the move to umbrella in light of upcoming changes to IR35 legislation, Umbrella Broker can help you find the best umbrella company for you.

Simply input a few key details and we’ll take care of the rest. Why not see how we can help you find your perfect match today?

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