After the recent revelations that a lot of Government contractors were avoiding tax by paying themselves through a personal service company, the Treasury has announced that all contractors earning more than £220 a day will have to pay the correct tax if they have been in a department for longer than 6 months. This decision is likely to affect virtually all the IT contractors who work in a government department.
When Danny Alexander, the chief secretary to the Treasury, started looking into the issue of contractors he found that 2,400 individuals were paid off payroll. Of those 85% got paid via a recruitment agency, 5% were self-employed and the remaining 10% worked through a limited company. Around 1,680 of the contractors earned more than £400 a day.
The new get tough approach is designed to ensure that anyone working in the public sector will be on the payroll unless exceptional temporary circumstances prevail. Contractors earning at least £220 pay day will need to assure the department they work for that they are meeting their tax and NI obligations.
It looks as if the government is now trying to encourage contractors to use an Umbrella Company. It was recently shown that the Treasury collects an average £10,000 more per year from an umbrella company contractor than it does from one working through a limited company. With an estimated 200,000 umbrella company contractors currently operating in the UK, that gives the Treasury £2 billion.
The freelance community is now hoping that the government doesn’t try to push them into umbrella companies as well. The UK has 1.6 million freelancers; just think of the extra revenue if it did!
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Image: Squeeze the middle by Patrick Feller
