The numbers have been crunched, the speech has been made and the iconic red briefcase – or ‘budget box’ – has made its appearance at Downing Street. Yes, the UK Government budget has been delivered for the coming financial year, with Rishi Sunak taking to the despatch box on March 11th.
The new Chancellor of the Exchequer has less than a month to prepare, following Sajid Javid’s untimely resignation in February. Despite this, he announced a number of significant changes to spending on everything from the environment to healthcare. Crucially, this also includes changes to taxation and statutory rights, which directly affect contractors across the UK.
In this post, we’ll take a closer look at the 2020 UK budget and discuss how it will affect contractors.
Why does the budget matter for contractors?
The UK budget takes place every year to set out government spending and any taxation changes for the upcoming financial year. It can cover a vast array of changes, from beer duty being frozen to increased investment in flood defences – both of which were confirmed in the Chancellor’s speech.
Given the recent outbreak across the UK, healthcare and dealing with the coronavirus was certainly one of the focal points for 2020. Within his budget, Mr Sunak outlined a £5bn emergency response fund for the NHS and a £500m hardship fund for vulnerable people. That was paired with £600bn for roads, rail, broadband and housing by 2025.
Naturally, this all affects contractors, who rely on public services just like the rest of the country. However, there are also a few key changes that will have a more direct impact on contractors from the UK 2020 budget…
Tax and National Insurance
By and large, income tax and corporation tax will remain the same in the 2020/21 tax year. However, it’s important to note that the planned cut in corporation tax from 19% to 17% will not take place. Following a drop from 28% in 2010 down to 19% in 2020, Boris Johnson put any further cut in corporation tax on hold in the run up to the 2019 general election. This could impact contractors operating as a limited company, who won’t have that extra tax cut in the coming year.
On top of that, a small change to National Insurance was announced. Previously, anyone earnings above £8,632 a year (or £166 a week) were subject to a 12% tax for National Insurance Contributions (NICs). From April 6th 2020, that threshold will rise to £9,500 (or around £182.70 a week).
Other than those working through a limited company, all contractors pay NICs through pay-as-you-earn (PAYE) taxation. That means they will get an extra £862 tax-free allowance, resulting in a saving of £104 per year.
Small businesses
As mentioned, the coronavirus outbreak was a focal point of the 2020 budget. Interestingly, a number of the points covered related to small businesses, many of which are run by self-employed contractors.
First and foremost, statutory sick pay will be on offer for any employees who want to self-isolate, even those who don’t have any symptoms. However, firms will be refunded for those sick pay payments as long as they have fewer than 250 staff.
Additionally, the Government will make loans of up to £1.2m available to cover “business interruption” from the coronavirus. This could include a shortage of employees or even a shortage of work due to clients self-isolating.
Another point of interest, although not strictly part of the 2020 UK budget, was the change of interest rates. The morning before the budget, the Bank of England announced an emergency cut in interest rates from 0.75% to 0.25%. That takes the cost of borrowing down to the lowest levels in history, making it easier for companies to borrow money when required, including small limited companies run by contractors.
What about IR35?
Of course, one of the biggest topics for contractors was the proposed changes to IR35. The government has previously announced plans to extend IR35 to the private sector from April 2020, which could affect a further 170,000 contractors.
Unfortunately, Mr Sunak didn’t touch upon the controversial legislation in his budget speech. That has led many to assume the Government is going ahead with their plans.
In short, that will mean all contractors, public or private sector, will have to pay tax like an employee if they’re found to be a ‘disguised employee’. That refers to any contractors who aren’t in control of their own working hours, type of work, locations and how they actually do the work.
Despite paying PAYE tax like an employee, however, they won’t receive statutory benefits like sick pay, paid leave and a workplace pension. On top of that, they may be required to pay back any tax they have missed as a result of being a ‘disguised employee’, leaving some contractors seriously out of pocket.
How an umbrella company can help
Working through an umbrella company is a great way to circumnavigate IR35, which is set to affect more contractors than ever before in 2020. Contractors are classed as an employee of the umbrella company, making IR35 irrelevant to their circumstances.
That means there’s no chance of being caught out. You get paid through PAYE, which the umbrella company processes for you. But crucially, you get statutory benefits in return. Put simply, it’s the freedom of contracting with the security and simplicity of employment.
