Contracting in 2016 - what to expect in the new year

With 2016 finally upon us, we take a look at the upcoming calendar year for limited company contractors and what is to be expected in the next 12 months.

There are plenty of developments expected this year, from tax legislation changes to the growth of 'super-contractors' that are commanding a premium for their specialist services. ContractorUK and Shaun Critchley of contractor accountancy firm Advance, teamed up to provide the five themes that are likely to dominate the professional freelancing and contracting landscape during the next 12 months.

IR35

IR35 was expected to play a big part in the recent Autumn Statement but nothing significant really came out of it. However, the government is expected to publish a consultation document on IR35 early in the new year to set out HMRC's thinking on the Intermediaries legislation and whether liability will be transferred to recruitment firms rather than remain with contractors. Other factors include Supervision, Direction or Control (SDC) and whether it will be the key IR35 test just like it will be for travel and subsistence (T&S). The new IR35 may not take effect until 2017 but news is expected to come out from the government that should provide clarity and it's thinking on what direction the tax legislation will be in.

Dividend Tax Changes

In April 2016, we will see changes the headline rates of dividend tax and the introduction of the new tax-free dividend allowance of £5,000. The income of dividends over £5,000 will be tax at either 7.5%, 32.5% or 38.1 which could potentially make some PSC owners marginally worse off, the overall impact will not be as significant as some commentators originally feared. Limited companies will still be the most tax-efficient model for contractors.

Employment Allowance

The Employment Allowance will be withdrawn for companies where the director is the sole employee from April 2016. The allowance allowed employers to reduce the amount of National Insurance Contributions (NICs) that pay for their employees by up to £2,000. Contractor limited companies will also no longer be able to claim the allowance. The original rules allowed you to claim allowance if you paid yourself any salary or paid any employers' NIC on that salary, providing you weren't caught by IR35 or the Managed Service Companies (MSC) legislation. 

The Super Contractor

Last year, there were reports of contractors charging huge daily rates as they were skilled in fields where there were shortages, with expertise in cyber-security being a hot area in particular. The law of supply and demand meant that recruiters and their clients would be willing to pay a premium for rare and in-demand skills and qualifications. 2016 is expected to see a continuation of this trend, leading to the creation of a two-tier contractor pay league. Other hot areas include Agile, mobile and customer journey mapping which could pocket five-figure day rates which could create a large gap between themselves and the rest of the contractor population.

Contractor Accountants

PSC owners are set to benefit from fierce competition between accountants, insurers and other specialists in the freelance and contractor market thanks to legislative changes affecting umbrella contractors and self employed professionals. This could mean a stream of promotions, offers and other things that may benefit your situation this year.

Should I go contracting?

If you're thinking about becoming a contractor but not sure of the benefits and differences to permanent work then be sure to check out our guide to whether contracting could be for you.