How Summer Budget 2015 affects contractors' cash

In what is potentially the biggest Budget for contractors since IR35 was introduced, IFA ContractorMoney explores the financial highs and lows of the Summer Budget 2015.

Landlords under attack

In his quest to create a fairer housing market, the chancellor used Summer Budget 2015 to make radical changes to tax relief for buy-to-let landlords.

So from April 2017, new tax rules will be phased in to ensure a “level playing field for homeowners and investors” as mortgage interest tax relief gets abolished.

Currently, landlords can claim tax relief on the interest portion of their mortgage repayments at their highest marginal rate which is costing the Treasury an estimated £6.3bn a year. From April 2017, landlords will be limited to claiming just basic rate income tax relief at 20% and this will affect anyone with a buy-to-let, from contractors with one property to professional landlords with a large portfolio of properties.

Mortgage interest rate relief was withdrawn from residential properties 15 years ago so George Osborne argues that this is a policy-change that is long overdue. If you already have a buy-to-let, then this will make the running costs more expensive when it comes into force from April 2017 onwards. There is also a concern that it will push rental rates higher to compensate. Positively though, investors considering taking on a property will be able to factor these costs into their calculations and reflect the burden in any prices they charge.

However, some contractors may be put off the idea of a buy-to-let as an investment due to the headlines that no more mortgage interest tax relief from April 2017 will generate. But we actually don’t expect to see a significant drop in interest, because initial signs are that contractors  know that as buy-to-let still represents a healthy investment option for the majority of them.

In fact, contractors that are hoping to buy their first home will likely welcome the news as it should make it easier for them to compete with landlords on the starter homes that are in such short supply, as landlords will be taking the increased costs in to account and therefore won’t be able to make such strong offers which should help to achieve the chancellor’s goal of a ‘level playing field,’ the words some contractors love to hate!

Contractor pensions are in the clear… or are they?

In the run up to yesterday’s Summer Budget 2015, there has been widespread speculation surrounding salary-sacrifice and whether the chancellor would take a sledgehammer to the current system. Ex-pension minister Steve Webb spread rumours that Mr Osborne would scrap salary-sacrifice altogether, which would have had disastrous consequences for the many umbrella company contractors who are making use of a pension arrangement to transfer their contract income as tax-efficiently as possible into personal hands.

Pensions didn’t escape completely though. With the chancellor being forced to make such stinging cuts to benefits, he has tried to avoid the bad PR that this will inevitably generate by balancing this at the other end of the scale by hitting those contractors that earn over £150,000. If you fall in to this tax bracket, you will also have your annual pension allowance cut at a rate of £1 for every £2 you earn over that £150,000 threshold, effectively leaving those earning £210,000 per year with just £10,000 annual allowance from April 2016! This is on top of the changes to the lifetime allowance made in the March 2015 Budget which will see a drop from £1.25million to just £1million in April 2016 which was dubbed “a cap on aspiration”.

Unfortunately, that may not be the end of these pension tax relief changes as Osborne announced in passing during his Budget speech that he will be publishing a ‘Green Paper’ aimed at consulting publicly on pension tax relief and salary-sacrifice. He mentioned the idea of changing pension tax relief to mimic the tax break currently offered on ISAs with a possible top-up from the government.

While it is unclear what the outcome of this paper will be, the message for contractors to take away is ‘buy now while stocks last,’ perhaps using retained profits, as come April you may be very limited as to how much you can invest tax-efficiently. If you have any unused allowance from previous years, then you can make use of ‘carry forward’ rules to invest up to £220k in the 2015/16 tax year. 

Contractors can pass on the family home tax-efficiently

During the election campaign, the Tories pledged to increase the inheritance tax threshold for married couples and civil partners to around £1m to allow couples to pass on their family homes free of the death tax, stating “If you have worked hard to own your own home then you should be able to pass it down to your children”.

Currently, inheritance tax at 40% applies to everything over £325,000 per person which has become inadequate in an age when some terraced houses in London are worth over a million pounds. The chancellor announced today that this would change from April 2017 to enable individuals to qualify for an additional “family home allowance” of £175,000 which is transferable and can be applied on top of the standard nil rate band of £325,000. This will allow most contractors to gift their house through the generations without any tax levy!

Good news for personal tax rates

Prime Minister David Cameron hinted at last year’s Conservative party conference that he felt too many people had fallen in to paying higher rate tax which was hitting the nation’s hardworking middle earners. The chancellor followed this up by announcing plans, tempered as far as contractors were concerned, by announcements on the taxation of dividends, to increase the threshold for the 40p tax rate to £42,700 in April 2016 and £43,300 in April 2017 during his March 2015 Budget. The chancellor accelerated this move yesterday though, saying that the higher rate tax threshold will increase to £43,000 from April next year instead.

Mr Osborne also proved his intentions to make good on his election promise to increase the personal allowance for income tax to £12,500 by the end of this government, announcing that he will increase the personal allowance from £10,600 to £11,000 next April. There was also a Budget promise to set the allowance at £11,200 from 2017-18.

In other news…

The chancellor has made good on the Tory election pledge to help working parents with their childcare costs, announcing that he will increase the number of hours of free childcare that 3-4 year-olds are entitled to from 15 hours per week, to a massive 30 hours from September 2017. This will be met with resounding cheers from all contractors with small children as parents currently pay £30-£70 per day for childcare for this age group.

To reward working people on the minimum wage, Budget 2015 also announced plans for a ‘National Living Wage’ which will be introduced at £7.20 per hour from next year, rising to £9 per hour by 2020 for all over 25-year-olds. To compensate for this and support small businesses, Mr Osborne will cut national insurance contributions for employers so that a small business could “hire four employees on the national living wage and pay no national insurance whatsoever”.

The chancellor made sweeping changes to benefits and welfare today including limiting tax credits for families with more than two children, cutting working age benefits to £23,000 for those living in London and ensuring that families with an income over £40,000 pay market rate rents if they are living in social housing.  

Contractors, you may have missed:

  • The government will introduce the Innovative Finance ISA, for loans arranged via a P2P platform, from 6 April 2016 and has now published a consultation on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowd funding platform.
  • From April 2016, the government will change the ISA rules to allow individuals to withdraw and replace money from their cash ISA in-year without this replacement counting towards their annual ISA subscription limit.
  • As announced at Autumn Statement 2014, the  government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016-17
  • The government will take action against IHT avoidance by individuals holding UK residences through companies.

Editor's Note: Further Reading on Summer Budget 2015 -

The Summer Budget squeezes contractors may have missed

Summer Budget 2015 hits PSC contractors, hard

Osborne in four-fold attack on contractors

Summer Budget 2015 - overview for contractors

Summer Budget 2015 - chancellor's full speech

Thursday 1st January 1970