IFA on how Budget 2013 impacts your pocket
George Osborne was under pressure from all corners yesterday as he made his annual Budget announcement in front of a packed, riled and noisy House of Commons. Here, Tony Harris of freelancers’ IFA ContractorMoney, looks at what announcements deserve the biggest cheers – not from the chancellor’s colleagues, but from the contractor community.
Personal income tax allowance lift
Osborne announced in Budget 2013 that the long-heralded increase in the personal income tax allowance to £10,000 has been bought forward to 2014. This significant achievement is almost a £4,000 increase on the income tax threshold that Osborne inherited from the previous government and will make a difference to almost every contractor's pocket when it arrives. Thankfully, higher-rate tax payers have not paid the price for the personal allowance boost this time and this new £10,000 threshold – only above which tax is payable - will apply to all earners from April 2014. That said, changes in the tax bands mean middle-earning contractors will, overall, feel the squeeze.
Tax-free childcare for working parents
Parents will be able to benefit from new tax free vouchers that will offer £1,200 childcare to parents earning less than £150,000 a year, in a move that aims to encourage more parents to return to work after maternity or paternity leave.
This will likely replace the existing childcare voucher scheme which is run by some employers but this time it will be open to everyone as it is not reliant on access to a work-backed scheme. This will open up childcare help to many contractors for the first time and will come into force from 2015. Ironically, it could reinstate some of the help that many freelance contractors lost when they fell foul of restrictions to child tax credit for those earning over £50,000.
Good news at the pumps (and in the pub!)
Contractors will be pleased to hear that the planned 3% increase in fuel duty that was due in September has been scrapped and so has the escalating beer tax which will now be replaced by a cut of 1p per pint. Other alcohol duty rises remain in place though, such as 10 pence extra on a bottle of wine. Gin drinkers are the hardest hit and must pay 39p extra!
Mortgages boost should help contractors up the ladder
Turning to more sober matters, the chancellor expressed his interest in igniting the housing market to build on the success of the funding for lending scheme, partly to boost the construction industry and partly to help Brits move onto - and up - the property ladder. In an exciting twist to an otherwise fairly standard Budget, he is introducing a ‘Help to Buy’ scheme for new build properties and a ‘Mortgage Guarantee’ for all potential homeowners.
The Help to Buy scheme is being funded to the tune of £3.5bn and will allow homeowners purchasing a new build property to put down a 5% deposit while the government pays the extra 20%. If you’re a contractor, this should allow you to secure the more competitive mortgage rates only available to those borrowers with a higher deposit.
This is not an entirely new idea but has previously been limited to first-time buyers earning under £60,000 a year. In a radical move, Osborne is extending the scheme to enable anyone to purchase a new build home (up to the value of £600k) under the same terms, regardless of income and whether or not you are a first-time buyer. So contractors moving up the ladder could also benefit. Using this scheme you only repay the government's loan when you come to sell the property.
The new Mortgage Guarantee scheme will be available to all purchasers on any property, regardless of the style, age or location of the property and whatever your earnings or current ownership status.
Encouraging up to £130bn of funding, the Mortgage Guarantee will be available from 2014 for three years and aims to offer mortgages to buyers struggling to come up with a large enough deposit to enable their house purchase.
This will be hugely beneficial to those contractors who are eager to buy their first home or to move on up the housing ladder. Working in a similar way to the ‘indemnity’ policies of old, the government’s Mortgage Guarantee will help reassure lenders that your purchase represents a sound risk (subject to the usual credit checks on you) in that if the worst should happen, and they need to repossess and sell at a loss - in addition to your deposit covering part of the loss - the insurance will help absorb all or a substantial part of any remaining capital loss.
Meanwhile, Osborne is also in discussion with the Bank of England over extending the Funding for Lending scheme which has been very successful in recent months at getting the mortgage market moving. We have seen rates dropping across the range of contractor mortgages we have access to, which is saving contractors hundreds of pounds per year on repayments. Any extension to Funding for Lending would be welcomed by the contractor community.
Pension tax relief – a narrow escape
Pensions seem to have suffered in recent budgets, with the annual allowance falling from £255,000 to £40,000 over the last three years of budget statements, and the lifetime allowance reducing from £1.8m to £1.25m. Thankfully this time, the chancellor steered clear of any further changes.
This will come as a huge relief to contractors who are using their full annual allowance as there was speculation that this may have been cut to £30,000 a year. Yet more worrying still were the rumours that the tax-free lump sum which contractors can release from age 55 was under threat. We are pleased to say that no such measures have been taken, so pension investment continues to offer one of the most tax-efficient methods of transferring contract income in to personal hands.
The move to a flat-rate pension of £144 a week has been moved to 2016, which could be good news for all those who have struggled to navigate the alphabet soup of state top up pensions from SERPS through to S2P.
Long Term care
Following on from the influential Dilnott report into care for the elderly, the government is set to cap long term care costs at £72,000. In theory this will put a limit on the proportion of an individual’s wealth that can be eaten up to pay for their later years, but the devil is in the detail as there are strict rules on what isn’t covered in the cap. Further work is still required, perhaps eventually allowing pension funds to be unlocked for nursing care.
Boost for investors
In a move to encourage investment in smaller companies, Osborne has axed stamp duty on shares traded in growth markets such as AIM from next April. This will allow contractors interested in self-investment the opportunity to access a far greater range of options. You could access these shares through a Self-Invested Personal Pension (SIPP) and benefit from tax relief on your contributions. The chancellor is also in consultation over whether to allow investment in AIM and other growth markets through the ISA system.
UK Domiciled Funds
In a move to help UK domiciled investment funds complete on a level playing field with their Dublin and Luxembourg-based competition, ‘schedule 19’ stamp duty reserve tax is being axed from April 2014. The tax amounts to potentially hundreds of millions over the life of a parliament and this will now be saved by investors.
The chancellor is planning to consult on whether to allow Child Trust Funds (CTFs) to be transferred to Junior ISAs, a move that would help millions of children who already own a CTF to have greater flexibility from their investment. Currently, children born between 2002 and 2011 are stuck on the old CTF system whereas children born since November 2011 have been able to access Junior ISAs. Parents and grandparents can invest in a Junior ISA in addition to their own ISA allowance, so this move would be welcomed by contractors.
The 2013 Budget was expected to be one of the most austere and downbeat of its generation thanks to £2.5bn of cuts that needed to be rolled out. To that end, and although it was a fiscally-neutral Budget, the chancellor had to put back his forecasts for a return to stronger economic growth and debt reduction. Perhaps such a gloomy backdrop will help make hard-working contractors feel slightly better about the single 20% rate of corporation tax being largely academic to them.
But as I’ve spelt out, the chancellor did have some new and exciting initiatives to counterbalance further cuts in spending. Generally, Mr Osborne focussed his efforts on encouraging industry and entrepreneurship but he also had room for some much-needed good news on personal taxation, mortgages, pensions, petrol and even pints! So a ‘cheers’ from some contractors might be heard this weekend, if only because the champagne is still on ice.