Dividend allowance cut to £2,000 as the public sector rules mark their first year
The new tax year has brought the contractor two anniversaries and one bill. The dividend allowance, introduced two years ago at £5,000, fell to £2,000 on 6 April. The public sector off-payroll rules, which shifted the IR35 decision from the contractor to the engager, are a year old. And the two together have produced the first year in which working through a limited company was, for a growing number of people, no better than being on the payroll.
The allowance cut was announced by Philip Hammond in March 2017 and survived the week in which the Class 4 National Insurance rise did not. It reduces the amount of dividend income that can be taken free of tax from £5,000 to £2,000. For a director taking dividends within the basic rate band the cost is £225 a year. For one paying at the higher rate it is £975. It was presented as a measure against the unfair advantage of incorporation, and for once the figures bear out the description: the allowance was worth most to exactly the people it was designed to reach.
The rest of the year's changes
The personal allowance rises to £11,850 and the higher rate threshold to £46,350, both a little ahead of inflation. Corporation tax stays at 19 per cent. The flat rate VAT scheme continues to carry the 16.5 per cent limited cost trader rate introduced last April, which has taken most contractors' companies out of the scheme's benefit. Class 2 National Insurance, which was to be abolished this month, has been kept for a further year while the Treasury works out what to do about the self-employed people who use it to protect their state pension.
The public sector, one year on
The off-payroll rules that came in on 6 April 2017 made public bodies responsible for deciding the IR35 status of every contractor they engaged, and made the fee payer, usually an agency, responsible for deducting tax and National Insurance where the engagement was inside. HMRC's check employment status for tax tool was released to help with the decision. A year later, the industry's account of what followed is consistent: blanket determinations by bodies that would not take the risk, contractors leaving the public sector for the private sector or for permanent employment, projects delayed for want of people, and a tool that many advisers regard as unreliable.
HMRC's account is different. The department says the reform has brought in significantly more tax from public sector engagements than the previous rules did, that the tool gives a reliable answer in the large majority of cases, and that the disruption to public bodies was small and short-lived. The independent research it commissioned on the reform's effects has been completed and has not been published. Whitehall's reticence has been noted by the industry, which expects the research to appear alongside a consultation on extending the rules to the private sector, and expects that consultation within weeks.
The Ackroyd effect
The First-tier Tribunal's decision in February against Christa Ackroyd, the former BBC presenter found to be inside IR35 on a contract she was told to sign, has made the year's other argument for contractors: that the people caught by the rule are often the least able to have negotiated their way out of it. HMRC has other broadcaster cases in the pipeline. The results of those, and of the private sector consultation, will decide whether the contractor of 2019 works through a company at all.