IT Contractor Tax - Accountants for Contractors

21st March - Read the Key Points from Budget 2012.

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What can contractors expect from Budget 2012? Will the 50p tax band stay or go? Will there be any IR35 announcements?

Income Tax

We are unlikely to see significant changes to income tax and National Insurance rates, as the rates and bands have already been set in advance.

More taxpayers than ever will fall within the 40p tax band, as the starting rate falls to £34,371 from April 6th 2012. Just two years ago, the higher rate band started at £37,401.

Currently, the personal allowance is expected to rise from £7,475 to £8,105 (although this may be increased).

As ever, the value of the personal allowance is eroded by £1 for every £2 you earn over £100,000.

However, there has been a lot of speculation in the press over the past few weeks over the fate of the 50p tax band. Even though the additional rate may have failed to raise significant extra taxes, the Chancellor will not want to appear to be appeasing the 'rich'. He may scrap the band altogether, reduce it to 45p, or not take the political risk of touching it for the time being.

Corporation Tax

The Chancellor is already committed to a further 1p cut in the main rate of Corporation Tax (for profits over £1.5m), although he may decide to go further and slash the main rate to match the small profits rate (paid by most contractor companies) of 20p.

IR35

In its final report on small business taxation, the OTS says it expects 'substantive progress' to have been made on IR35 since the last Budget. Although we are unlikely to see any fundamental changes to the IR35 rules, there may be some clues as to how the legislation will be administered in the future.

Other Possible Business Measures

The Annual Investment Allowance (AIA) is due to be cut from £100,000 to a mere £25,000 from 1st April. Given how important investment is to the recovery, the Chancellor may decide to postpone the cut, or make it less severe.

The Chancellor is widely expected to announce his plans for a General Anti-Avoidance Rule (GAAR).

There has also been speculation that the Chancellor may make changes to higher rate tax relief on pensions, which would mean that higher rate taxpayers would only receive basic (20%) relief on their contributions. The current system of tax reliefs has only been in place for 12 months, so changes seem unlikely, although you can't rule out the abolition of tax relief for additional rate taxpayers.

George Osborne has promised to come down hard on the use of overseas companies to avoid paying stamp duty on house purchases. This loophole is estimated to cost over £1bn per year.

An update on the proposed changes to the child benefit system is likely given the unfairness of the original proposals.

Visit Contract Eye on Wednesday for full coverage of Budget 2012.