Contractors hit by dividend tax reform in Autumn Statement 

Chancellor targets contractors with dividend tax changes and tax freezes

Jeremy Hunt set out his fiscal plan on Thursday 17th November, with the aim of reducing the £55bn gap in public finances and lessening the impact of the now announced recession.

While some tax increases were expected, the extent of them has left industry experts reeling, with Andy Chamberlain – Director of Policy at IPSE – slamming the government for “making it harder and harder for those who work for themselves”. 

“Time and again it seems our very smallest businesses are the first target”, Chamberlain said.

“We’ve already seen the number of self-employed fall dramatically since the pandemic – the government seems intent on reducing that number further”, he added.

Increasingly aggressive tax regime

Alongside an increase to corporation tax which is set to take effect in April 2023, contractors will have to contend with an increasingly aggressive tax regime:

Dividend tax threshold slashed

The point at which tax is due on dividends will reduce to £1,000 in April 2023, from £2,000. The year after, it will fall to just £500. 

Income tax frozen

The basic (20%) and higher (40%) income tax rates have been frozen until 2028, with the additional rate threshold falling from £150,000 to £125,140 in April 2023. 

As part of this, the personal allowance (£12,750) will also be frozen until 2028.

NI rates frozen

National insurance rates will remain as they are until 2028 – another freeze which is likely to see more self-employed workers pay more tax as inflation increases.

VAT threshold

Another tax freeze, the VAT threshold of £85,000 will stay set until 2026.

Capital gains tax hit

From April 2023, the capital gains tax threshold will drop dramatically, from £12,300 to £6,000. In 2024, this will be halved, to £3,000.

National living wage rise

This will increase next April, from £9.50 an hour to £10.42 – in a move benefitting umbrella workers and employees. 

Finally, the Chancellor failed to address IR35 reform during the Autumn Statement. 

However, the official Budget document confirms that there will be no changes to the problematic off-payroll working rules – it means IR35 reform will stay. 

Government “does not support small business”

Chamberlain accused the government of creating challenging conditions for independent workers, with damaging IR35 reform compounded by aggressive increases to dividend tax and corporation tax.

“After the financial damage of the pandemic, exclusion from support, the changes to IR35 taxation, the recent tax hike on dividends and the impending corporation tax hike, this latest attack is further salt in the wound for anyone working through their own company.

“By slashing the dividend allowance, the government has once again demonstrated that it does not support small business”, Chamberlain concluded.

HMRC should focus on tax avoidance

Fred Dures, founder of PayePass, questioned why contractors and freelancers were being targeted with higher taxes, instead of HMRC clamping down on the “dodgy operators” of tax avoidance schemes which deprive the government of “hundreds of millions, if not billions, in tax every year”.

“The government is desperate to raise tax receipts, but is doing very little about stopping tax avoidance schemes.

“For whatever reason, combatting these schemes clearly isn’t a priority for the government. These schemes don’t just reduce the Treasury’s tax take – they pose a huge risk to contractors, recruitment agencies and the businesses engaging temporary workers. 

“Doing more to tackle these firms is a no brainer. Why it’s being overlooked is beyond me.”