A continuing rise in self employment has resulted in a drop in the income tax take in every region of the UK.
12% of the UK is now self employed and those that are could earn the same gross but will pay less income tax on their earnings. For instance, salary at a the basic rate is taxed at 20%, whereas dividends are taxed at 7.5%. Of course, corporation tax of 19% will have been paid on profits before dividends are distributed so it is not as wide as gap as it sounds.
The trend began during the 2008/09 recession, when many people found themselves redundant and started in business for themselves and re-entered the market as contractors which businesses could employ on a short term basis. Since then, the increase in the so called ‘gig’ economy and younger workers wanting more flexibility has continued the trend for self employment.
However, upcoming changes to IR35 legislation could change this pattern and reverse the fall in take. The legislation, designed to stop people artificially arranging their affairs to appear as self employed when in fact for all intents and purposes they are employed, has only been applied to the public sector up until now.
From April 2020 it will apply to the private sector for medium and large firms who use contractors to avoid paying tax, NI and pension costs on behalf of employees, so they could be facing much larger bills in future. HMRC estimates that roughly £1.2 billion of income tax is lost through employees posing as contractors so they have a real incentive to get these changes implemented.
If you think you will affected by the IR35 changes then please get in touch to discuss.