Posted May 3, 2017

Tax Changes for Contractors

There have been unprecedented number of tax changes affecting the contractor sector recently.

Below we have considered some of the changes due to affect the contractor sector this year.

IR35 and Public Sector Contractors

From April, most contractors working with the public sector are likely to be caught under the new IR35 rules. This means that the contractor is likely to pay significantly more tax.  They will be classified as an “employee” although without all the usual employment rights.

We expect because of these changes, contractors who are able to move into the private sector will do so and the remaining contractors may expect an increase in their remuneration to compensate for the additional tax liability.

If you are not sure whether IR35 applies to your business, HMRC have developed a useful tool to assist you:

Changes to the Flat Rate Scheme

The Flat Rate Scheme was used by many small businesses to reduce the administration of accounting for VAT.  However, HMRC believed that the scheme was being abused and as a result has introduced an additional rate of 16.5% for “Low Cost Traders”.

You can read about the changes and their impact in our previous blog on the changes to the Flat Rate Scheme here.

Dividend Tax

The way dividends are tax changed in April 2016, a tax free dividend allowance of £5,000 was introduced and any dividends earned in addition to this were taxed at the following rate:

dividends falling within basic rate tax – tax at 7.5% of the dividend received
dividends falling within higher rate tax – tax at 32.5% of the dividend received
dividends falling within the additional rate of tax – tax at 38.1% of the dividend received


From April 2018, the tax free allowance will be reduced to £2,000. Anyone earning more than £2,000 in dividends from April 2018 will have to register for self-assessment tax.


If you are a Leeds based contractor, why not contact us for further details on IR35 and the most tax efficient way to structure your business.

The information contained above is provided for information purposes only and is not intended to amount to advice on which reliance should be placed. We therefore disclaim all liability and responsibility arising from any reliance placed on such information. Professional advice should be obtained before taking or refraining from taking any action as a result of the above contents.