Contractors: What the Summer Budget Changes Mean for You.

Are you a freelance contractor paying yourself with dividends?

If you are then you should be aware that Chancellor, George Osborne’s, latest Budget has a sting in the tail which just might have repercussions for you.

In the summer Budget, Mr Osborne, specifically targeted contractors’ income.


He announced that the dividend tax credit will be replaced in April 2016, with a new tax-free allowance of £5,000. This is an important announcement, as it changes the landscape for contractors who pay themselves in dividends. Although the Treasury has said that ‘ordinary investors with smaller portfolios and modest dividend income’ will see no change in their tax liability, the rates are being hiked nonetheless.

Currently, dividends paid to basic-rate taxpayers are regarded as taxed already within the corporate tax system; effectively that means there is no additional tax to pay. But under the new rules, only the first £5,000 a year of dividend income will remain exempt.

For dividend income above this tax-free allowance, from next April basic-rate taxpayers will pay 7.5%, while higher-rate taxpayers will be required to pay 32.5% tax. What’s more those who pay the additional rate of 45% will face a 38.1% tax bill.

So what’s the rationale behind this?

Well, according to the Chancellor it’s simply one of a number of measures to increase the total tax intake. However, he was keen to play down the impact on contractors, stating:

“Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax; [but] 85% of those who receive dividends will see no change or be better off.”

The removal of the dividend tax credit was just one of four key issues that will affect UK contractors going forward. The others include:

  • A move to prevent sole employees of their own limited companies from claiming the NICs Employment Allowance. Currently, contractors can offset the £2,000 allowance against employers’ NIC arising on ordinary salary. However, from April 2016, contractors who pay themselves any salary will no longer be entitled to claim the Employment Allowance.
  • The Chancellor is proceeding with plans to ban tax relief on travel and subsistence expenses; most notably those contractors who are ‘supervised, directed and controlled’.
  • Finally, in a bid to wrong-foot and frustrate contractors’ advisers, the Chancellor confirmed that IR35 will, once again, be reviewed.

Some contractors will hope the envisioned “reform” to IR35 could be an opportunity to clarify the legislation – as many accountants will hope – but the government’s wording would suggest otherwise:

“As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough … the Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation,” the Treasury said.

If you are a freelancer or contractor and would like clarification and guidance on your financial position after the changes announced in the summer Budget, then speak to Steven Glicher accountants. For more information, call our accountants on 0161 485 8007 or email

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