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Budget 2008 - How IT Contractors are affected

Published on Mar 14, 2008 |

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In what has be called a fairly dull Budget, there are a number of changes which will affect IT Contractors. Some were mentioned in the Chancellor's speech, but the more important measures were consigned to the small-print. We look at some of the key points in this Budget Summary.

Income Shifting

The most crucial change mentioned in the Budget is the delay of the so-called "income shifting" legislation. This family business tax has been put off until the start of the 2009 tax year. You can read our separate report on the income shifting delay.

CGT Changes

In his Pre-Budget Report, the Chancellor announced the abolition of the current Capital Gains Tax taper relief scheme. From April 6th 2008, a new flat rate of 18% will apply to business disposals (up from 10% beforehand). To "soften the blow", so-called "entrepreneurs' relief" has been introduced. Business people will still be able to pay 10% CGT on the first £1m value of business sales before falling under the new 18% rate - however, this is a lifetime allowance.

Umbrella Company Warning

HMRC has indicated that it will continue to crack down on umbrella company schemes which abuse travel expenses arrangements.

"The Government is concerned at the growing use of structures, such as 'umbrella companies' or overarching contracts of employment with employment businesses, to obtain tax relief for travel expenses that would not be available to other workers. It will monitor the use of these structures and, if necessary, consider action in the future".

This follows on from an HMRC statement in February, announcing a clampdown on umbrella companies which abuse their expenses dispensations.

Tax Changes

Although the main rate of corporation tax will drop from 30% to 28%, the Small Companies Tax Rate (which applies to IT Contractors) rises from 20% to 21% from April 2008. And to make things even worse, the rate will increase once more in April 2009 to 22%.

The 10% income tax rate has been abolished, whereas the main income tax rate has decreased from 22% to 20%. Ironically, this change is more likely to penalise low earners (people earning a salary of under £8,000 per annum).

The 20% rate applies to income in the £0 - £36,000 tax band, and 40% for all income over £36,000.

The personal allowance has increased from £5,225 to £5,435 in 2008/9.

Close inspection of the 2008/9 National Insurance rates also reveals a massive £100 rise in the Upper Earnings Limit for Class 1 Contributions - the limit has risen from £670 to £770 per week. For someone on a £40,000 salary, this could result in £520 extra taxes per year.

For more in-depth Budget 2008 coverage, visit our small business site, Bytestart.