Key changes outlined in the Autumn Statement reduce IR35 risk for businesses
This year’s Autumn Statement included a few amendments that contractors, freelancers and businesses that hire self-employed workers should be aware of. The stand-out changes highlighted in this article include a reduction in National Insurance Contributions (NICs) for self-employed workers and yet another amendment to the controversial IR35 ‘off-payroll’ rules.
IR35 offset
The latest changes to IR35 rules will allow HMRC to offset tax and NICs that have already been paid by a contractor’s Personal Services Company (PSC), if the contractor is deemed to be operating inside IR35. Under previous rules the PSC’s contributions weren’t taken into account, which meant that ‘double-taxation’ was likely to occur with both the fee-paying business and the PSC liable to pay the full tax bill.
| Old rule (2021 Independent Contractor Rule) | New Rule (Effective March 11, 2024) | |
|---|---|---|
| Basis of classification | Relied on a simpler, more straightforward approach that may not fully capture the complexity of modern work relationships. | Restores a multifactor "economic reality" test that considers a wider range of factors to determine employment status. |
| Legal consistency | Criticised for deviating from established legal precedent and potentially leading to more misclassifications. | Aims to align closely with longstanding legal precedent, offering more clarity and consistency in classification decisions. |
| Impact on workers | Concerns were raised that it might make it easier to classify workers as independent contractors, potentially denying them employment benefits. | Seeks to reduce the risk of misclassification, ensuring workers who should be classified as employees receive the benefits and protections that they're entitled to receive. |
| Guidance for employers | Provide a simpler framework for employers to classify workers, which could lead to broader interpretations and confusion. | Offers detailed guidance through the economic reality test, aiming to provide a clearer path for proper classification and reduce misclassifications. |
Changes to NICs for self-employed workers
While many businesses will be reviewing their policy on engaging with PSCs, the biggest change for self-employed workers was to how contractors and freelancers pay NICs.
Class 2 NICs axed for those with profits above £12,570
Some two million self-employed people with profits above £12,570 will benefit from the axing of Class 2 national insurance. While nobody in this group will be required to make Class 2 payments, they will still receive access to contributory benefits, like the State Pension.
Changes to Class 2 NICs for those with profits below £12,570
Those with profits between £6,725 and £12,570 won’t have to contribute but will receive a National Insurance credit, and those with profits below this will continue to be able to make voluntary contributions in order to receive the benefits.
1% reduction in Class 4 NICs
Chancellor Jeremy Hunt also announced a cut to class 4 national insurance from 9% to 8%, which he said will result in an average saving of around £350 a year. Both of these changes will take effect from 6 April 2024.
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