With October in full swing and Budget Day fast approaching, the question on a lot of contractors’ lips is ‘what changes will be announced that affect our sector?’. After all, the government’s annual budgets have become the time where some of the most significant changes affecting contractors have been brought into play, namely IR35 and the Off-Payroll Working rules.
And with Sir Keir’s warning that the upcoming budget would reveal ‘painful’ policies that will not be ‘business as usual’, anxieties from IT contractors may not be so misplaced.
So, what can be expected come October 30th under the lead of Labour’s Chancellor Rachel Reeves? While we can only speculate at this point, the hints dropped thus far indicate some unpalatable news is on the way for contractors. Let’s take a closer look at what that may entail.
What do we know so far?
If we work off previous years and analyse the two most significant frameworks introduced (IR35 in 2000 and OPW in 2017), we can see that those in power don’t shy away from making changes that have a big impact on the rate of take-home pay.
What’s more, Labour has already promised that income tax, Employee’s NI and VAT rates will not be increased, which leads us to look to other taxes that could be targeted to fill what has been referred to as a ‘£22 billion black hole’ in finances inherited from the previous party.
What does this mean for contractors?
Labour’s options for generating revenue, if they stay true to their word, will be limited and may cause the following areas to be targeted:
Pensions Tax Relief
It’s possible the government will look to remove or amend pension tax relief for higher earners or those making additional contributions. If a flat rate is introduced (regardless of the saver’s income), many contractors who currently contribute larger amounts of their pay into pension pots for retirement will be taxed more, making a dent in savings.
Employer’s National Insurance
There is growing concern that, while Labour pledged not to increases taxes for the ‘working people’, they may look at targetting Employer’s National Insurance (ER NI) instead. After sidestepping direct questions about changing the rates of ER NI last week, speculation has begun as to whether the initial pledge to exclude NI increases was referring only to employees and not employers. Increasing ER NI even by a small percentage could generate billions of pounds in taxes, leading experts to believe it’s a likely consideration for Reeves. The hike of ER NI, though the responsibility of employers, will likely affect workers too. For many contractors, the impact may be felt if the burden of higher ER NI contributions is passed on to them in a knock-on effect; higher Employer NICs means increased overall business expenses which could lead to a reduction in salary.
Main Impacts
After Prime Minister Keir Starmer’s comment that those with ‘the broadest shoulders should bear the heaviest burden’, we can surmise that whatever changes are on their way will be adjustments that directly impact income. Those who are higher earners and pay higher taxes are potentially in store for some tax increases.
Needless to say, a period of change often goes hand in hand with a period of instability. As such, the contracting industry should prepare itself for some turbulence. However, the last thing we want to do is scaremonger! This sector has seen change before, and it’s survived; it will survive again. There may be challenges on the way, especially when it comes to starting and growing small businesses, but it won’t be the end of this industry.
What can we hope for?
It’s certainly not all doom and gloom. While big changes are in store, FCSA (Freelancer & Contractor Services Association, enforcing compliance, transparency and reliability for temporary workers) hopes many of these alterations are positive. As part of their predictions for new rules for the contractor sector, they cite the following as areas that might be addressed in the upcoming budget:
- Review and reform of IR35 legislation/ the OPW rules. Hopefully this will reduce complexities encountered and ensure fair treatment
- Enhanced support for small businesses and startups, whether that be by tax breaks, grants, or other incentives that encourage growth and sustainability
- Better support for compliance and best practice
You can read the full predictions from FCSA in more detail here.
As Reeves sets out to create stable conditions for economic growth, we hope the contractor sector won’t be forgotten and that there will be a recognition of value in this vital sector. We’d also like to see money being invested in upskilling and nurturing employee talent. Let’s hope some clarity and support is on the way.
Mark your calendars
We’ll be posting blogs and content weekly in the run-up to Budget Day so make sure you check back on our website and follow us on socials for the all-important updates and information.
In other news…
Have you been keeping up to date with the latest on the Employment Rights Bill? It’s important you familiarise yourself with the new proposals and relevant dates for implementation to ensure any contracts you sign up to are offering the correct terms. That way, you’ll know exactly what you’re entitled to and can query certain elements if businesses choose not to advertise some of the rights. You can read our summary of key points from the recent ERB announcement here.
