Contractor Budget Shock – Hammond. Effective Freelancer 25% Pay Cut

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contractor budget shock
contractor budget shock

Contractor Budget Shock

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There is a massive contractor budget shock looming for those who freelance in the UK.

Chancellor Philip Hammond has an effective contractor pay cut in his Budget which is to be delivered on November 22nd.

Hammond, and Prime Minister Theresa May want to right what the see as a terrible wrong.

They have both said that it is very unfair that a freelancer earning £100,000 a year should pay less tax than a permanent employee who earns £100,000.

They want to fix that terribly unfair anomaly.

Contractors and Employees

However, it is not comparing like with like. An employee earning £100,000 a year gets:-

  1. Much greater job security
  2. Future promotion prospects
  3. Paid holidays
  4. Sick Pay
  5. Maternity Leave
  6. Pension contribution paid
  7. National Insurance contributions paid
  8. Employer national insurance paid
  9. Potentially share options
  10. Insurance that contractor have to pay themselves

A freelancer often has to buy equipment and pay for his or own travel and subsistence if he, or she, has to work away from home.

Contractor has More Expenses Than Permanent Employee

So, a freelancer earning £100,000 a year has much more in the way of expenses to pay than a permanent employee.

Also, he, or she, is not guaranteed work all the year round and may have to use previous earnings to keep afloat till the next contract comes around.

One can see the hands of the big consultancies in this.

Big Consultancies Hate Contractors

The big IT consultancies have always hated contractors.

They believe that, if there are no contractors, they would supply all the flexible workforce at huge fees for people who were graduates not too long ago.

Governments of all hues pay a fortune every year for advice from these big consultancies.

One can imagine them telling the Prime Minister and the Chancellor (both permanent employees paying full tax) how unfair it is that freelancers can pay less tax.

That’s where this contractor budget shock stems from.

More Effective Lobbying Group for Contractors

If freelancers had a more effective lobbying body than IPSE one feels that contractors wouldn’t always have these problems.

Every year there is a fresh attack on Contractors and how they operate. There’s always some contractor budget shock.

If Contractors Groups had the same influence that the big consultancies have with Government they could point out how the PM and Chancellor’s statements about this ‘unfair anomaly’ is not comparing like with like.

Roll Out Public Sector IR35 Changes

What is proposed is that the Government roll out the same changes that they made in the public sector earlier this year to the private sector.

They would take away the right of contractors to choose their own IR35 status.

It would be the people hiring the contractors who would decide their status.

Now, here’s the rub.

If the company gets it wrong they will have to stump up the contractor’s taxes, penalties and interest themselves.

That’s very sneaky.

Advice from Big Consultancies

In the public sector, many Government departments were advised by the big consultancies to take no risks and so don’t use contractors operating through personal service companies or limited companies.

Many departments took that advice.

HMRC devised s new online test to help Government departments decide the status of their contractors.

This test has no basis in law. The laws hadn’t changed.

However, many Government departments used this as the definitive statement on whether contractors are inside IR35 or outside.

It was even more ridiculous in departments where they refused to use personal service company contractors.

Often the contractors took the test and passed it but were then taxed as if they had failed it.

Cost to Contractors in Contractor Budget Shock

So, what will the cost be to contractors if and when this is implemented?

Many locums in the NHS system said that this was effectively a massive pay cut for them of 30%.

Wow!

It seems that the average contractor who the test showed are inside IR35, or who works at a place where they tax all contractors as employers would now have a take home pay of around 60%.

For some higer paid freelancers it would be even less.

Now, many contractors operating through their limited companies, who take low salaries and are paid in dividends, can keep around 80% of their income after tax and NI.

So, if they only get 60% now that would be a massive pay cut of 25% of their income.

NHS Paying More for Locums

We have seen, form figures published recently, that the NHS has had to pay locums 6.3% more on average in the 6 months since April. That’s at an annual rate of around 13%.

So, this has pushed NHS costs up. One would imagine that the pay rates of locums would continue to rise well above average pay rises.

This may well happen over a period of time in the private sector too.

This would push up the costs of companies operating in Britain at a time when they have to deal with Brexit too and possible future tariffs to sell their goods abroad.

Companies Selling Less

With the higher cost of the goods and services that these companies make or do, they are likely to sell less of them.

That would mean that they would pay less tax to the Government.

They would employ fewer people too and those people would not only not pay tax but may use state benefits.

So, this is all counterproductive.

Highly Effective Freelance Sector

So, why meddle with what is a highly effective and growing sector, i.e. the freelance, flexible workforce community just to fix an ‘unfair anomaly, but which is neither an anomaly nor unfair?

The one good thing about this is that it is just a proposal at the moment.

The Chancellor and PM may be flying a kite here to see if there is any resistance to this in the country.

They often do this with potentially controversial proposed Budget measures.

So, it may well be a case of how much of a stink that contractors can make about this and how effectively their representatives can mobilise contractors and lobby against it.

Otherwise with this contractor budget shock most private sector contractors will be facing an effective 25% pay cut next April.

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