With 2019 behind us and 2020 in full swing, it’s important that all self-employed individuals keep themselves informed of contractor changes in 2020. Doing so will ensure that they are able to fulfil their obligations with regard to HMRC, but also budget adequately for any additional expenses they may incur in the form of tax and national insurance contributions (NICs) in the coming year.
The biggest news for contractors in 2020 is the expansion of IR35 to merge both the public and private sectors under the same legislation. By HMRC’s own estimates, this could mean that 170,000 individuals across the UK are now liable to pay thousands of pounds more in tax and NICs, while their employers will also incur elevated costs as well.
But while IR35 might be the headline-grabber of the coming tax year, it’s not the only thing that’s changing in 2020. Read on to learn more about the upcoming amendments to UK tax law and how they affect you, as well as what can be done to avoid the worst consequences of the new legislation.
Contractors, IR35 & 2020
Since April 2017, HMRC amended the legislation surrounding IR35 contracts within the public sector. As of the rule change, the end client became responsible for ascertaining whether the contractor was “within” IR35 or not – and since many of them did not want to run the risk of incurring unnecessary fines, they simply implemented a blanket policy whereby all contractors were deemed as IR35 applicable.
From April of next year, that regulation is to be extended to include all private sector contracts, as well. This means that well over a hundred thousand self-employed people in Britain may now themselves be deemed as “within” IR35 and thus liable to pay a considerably larger tax bill. The fact that the end client may also be deemed an employer could deter them from taking on self-employed contractors, too, since they will be forced to treat them as an employee.
How to protect yourself from IR35
One way for contractors in 2020 to avoid having to pay the additional contributions is by assessing and amending all of their existing contracts. In doing so, they must ensure that the wording of the contracts is clear in how it delineates autonomy and control of their situation, as well as being able to send a substitute in their place. Finally, they should also pay particular attention to mutuality of obligation – the idea that the client is obliged to find work for the contractor and the contractor obliged to accept it.
These three tenets are the basic principles upon which HMRC judges whether or not someone has fallen within the remit of IR35 or not. If you are able to alter the terms of your contract to specify that you (the contractor) are in control of all arrangements, that you’re permitted to send a substitute in your place and that there is no obligation at either end for you or your client to provide or accept work, you should safely escape the trappings of IR35 and the additional costs which come with it.
However, it makes prudent financial sense to have a trained professional review the terms of your amended contract to give their opinion on how it may be viewed by HMRC.
Sourcing an umbrella company
An alternative to the painstaking process of redrafting and reviewing contracts is joining an umbrella company. These firms “hire” self-employed contractors to join the company payroll, for all intents and purposes serving as a bona fide employee in the eyes of HMRC. However, the beauty of an umbrella company is that they allow the contractor to continue functioning in much the same way as before – picking and choosing which clients they work with, defining the terms of all contracts themselves and organising their own working routine.
At the same time, umbrella companies offer a multitude of other advantages, as well. They’ll take over all the arduous account-keeping, including filing invoices, chasing clients for payments, keeping receipts and handling tax returns at the end of the year. And as technically an employee, you’ll receive all of the statutory benefits that the rest of the British workforce does, including holiday pay, sick pay, maternity or paternity leave and pension contributions. Of course, the specific umbrella company you choose may differ on what exactly they offer you, so it’s a good idea to use a comparison tool to weigh up your options beforehand.
Other contractor changes in 2020
Aside from contractors’ IR35 2020 legislative changes, there are also updates to income tax rates and thresholds, with the latter being raised across almost all sectors. Here’s a breakdown of the new thresholds alongside last year’s for those living in England, Northern Ireland or Wales:
| Description | 2018/19 threshold | 2019/20 threshold |
| Personal allowance | £11,850 | £12,500 |
| Employee’s and employer’s NICs are compulsory at | £8,424 | £8,632 |
| Higher tax rate applicable at | £46,350 | £50,000 |
| Class 2 NICs compulsory when profits exceed | £6,025 | £6,365 |
| Class NICs payable per week | £2.95 | £3.00 |
Meanwhile, Scottish income tax is also due to undergo some changes. These are as follows:
| Band name | Band allowance | Rate |
| Starter rate | £12,501 – £14,549 | 19% |
| Basic rate | £14,550 – £24,944 | 20% |
| Intermediate rate | £24,945 – £43,430 | 21% |
| Higher rate | £43,431 – £150,000 | 41% |
| Top rate | £150,001 and above | 46% |
While these were introduced in April 2019 for employees, contractors completing their self-assessment returns for the January deadline may only encounter these changes at the start of 2020.
The Scottish regulations are only applicable to non-dividend and non-savings income. For example, the sole director of a company would still pay UK tax rates on any dividends received, but Scottish tax rates on their salary.
Over in Wales, contractors will also see some changes to their income tax, which will now be denoted with a C (for Cymru) at the beginning of their code, just as Scotland has an S at the beginning of its tax code. The changes are as follows:
| Band name | Band allowance | Rate |
| Basic rate | £12,501 – £50,000 | 20% |
| Higher rate | £50,001 – £150,000 | 40% |
| Additional rate | £150,001 and above | 45% |
