How contractor finances fared at AS 2016

Much like a steely poker player unfazed by his opponents, chancellor Philip Hammond yesterday showed a steady hand when it came to laying down policies on contractors’ personal finances, writes Luke Somerset of IFA ContractorMoney.  

While he may have lacked the flair of his predecessor, Mr Hammond did deliver some subtle yet potentially impactful changes affecting contractors and, fortunately, there were no real wild cards.  

Steady-hand Hammond

He uplifted the Personal Allowance and confirmed that from April 2017 it will be set at £11,500, increasing to £12,500 by 2020. He reassured wannabe-home owners that Help to Buy Equity Loan, which provides a 20% interest free deposit to contractors who purchase a new home, is here to stay. And he kept childcare vouchers and pensions as some of the few remaining non-contentious tax breaks, with nest eggs seeing no change to the £40,000 annual tax-free contribution limit or the lifetime allowance.

After all the back and forth that pensions have seen, contractors will embrace the fact that Mr Hammond kept the status quo and didn’t do anything to harm them as a crucial tax planning vehicle.

Moreover, given the IR35 revamp that’s at hand, we expect contractors to revisit their pension options to deal with any future changes which could affect the ability to extract income from their company. The complexity of these changes if you are contracting in the public sector have highlighted the importance of the relationship between your accountant and IFA to ensure you aren’t paying too much tax.

You shuffling between this duo is all the more important because the following announcements at AS 2016 do have the potential to take from your chip stack, or restrict it:

  • Insurance premium tax to rise from 10% to 12% from next June.
  • Employer/Employee NICs to be equalised from April 2017.
  • A new £4,000 cap on the Money Purchase Allowance.
  • Benefit in Kind tax to become more wide-reaching.

But steady-hand Hammond dealt out some positives too:

  • NS&I will offer a new market leading 3-year savings bond, open to those aged 16 and over, available for 12 months from spring 2017.
  • The higher rate tax threshold will be increasing to £50,000 by the end of the current parliament.
  • The level of corporation tax will decrease to 17% by 2020 (as set before the AS).
  • A consultation will soon be unveiled on options to tackle pension scams, including banning cold calling in relation to pensions.

April: Landlords’ card marked

Housing was one of Mr Hammond’s big themes yesterday. But despite what seem like his good intentions, we are concerned about the impact of cumulative and sustained landlord-targeted changes and the impact that these will have on tenants. Additions in AS 2016 may just tip the scales too far – if they hadn’t already been. 

This is because landlords have faced increases to their running and acquisition costs in previous Budgets and from April, will see their tax bills tick up significantly as the Mortgage Interest Relief changes begin to bite. This is on top of increased mortgage scrutiny and regulation which is making it increasingly difficult for landlords to access cheap mortgage deals at the point of remortgage. 

Add to that the seemingly innocuous abolition of letting agents’ fees charged to tenants (not a bad thing in principal), and the resulting increase to landlords’ letting costs will likely spell increased rents for tenants.

For landlords, there’s limited time to act – just four months to be precise – before the changes start to irrevocably impact the profitability of their investment properties.

First-time buyers would do well to review their purchasing options ahead of the expected April rent hike. The cost differential between renting and owning puts home ownership at the cheaper end.

Moves on housing

Beyond these concerns, we were pleased to see some innovation from the chancellor on the housing front. Where previous chancellors and governments have tinkered with changes to planning legislation, or set up local development frameworks which have mostly come to nothing, this chancellor sought to address one of the fundamental issues affecting house building in the south of England – an area plagued by high house prices and a shortage of new stock.

Announcing a £2.3bn Housing Infrastructure Fund, Mr Hammond will pave the way for road, rail and school expansion in areas where these issues have prevented successful planning applications in the past.

This initiative will run alongside a £1.4bn fund targeted to deliver 40,000 affordable housing, great news for first time buyers, and a promise to review the UK’s planning laws.  And as mentioned at the outset, Help to Buy was kept on the table yesterday. This scheme has enabled many contractors to get onto the housing ladder and with the planned investment to stimulate house building, it could help many more contractors onto the housing ladder.

Three of a tax kind 

  • No more dual tax updates every year, as the Autumn Statement is to be axed
  • Tax advantages linked to Employee Shareholder Status abolished
  • Planned rise in fuel duty cancelled

Pair of ISAs

The maximum ISA allowance will increase from April 2017 from £15,240 to £20,000

Also from April, the new LISA (introduced by Mr Hammond's predecessor) will allow 18-39-year-olds to invest up to £4,000 a year, plus a bonus of 25% 

Final analysis

Outside of personal finance, contractors may feel this morning that the new chancellor has stacked the deck against them. They’ve been attacked with IR35, shocked by a higher rate on the VAT Flat Rate Scheme and face threats in the future around incorporation. On the personal finance table however, there was a much less of a dramatic play by Mr Hammond, no tricks or bluffs but a steady-hand approach that was designed to quietly reassure and subtly stimulate. Only time will tell if his gamble to not go ‘all-in’ will pay off.

Nov 24, 2016