How contractor finances fared in Budget 2015
A big ‘shout-out’ to contractors in the House of Commons yesterday, just minutes before Budget 2015 had even begun, now looks like it was a warm-up act to the chancellor himself.
That’s because where freelancers’ tsar David Morris MP started -- telling MPs to support the self-employed -- George Osborne continued with a Budget to support their finances, writes specialist IFA Contractor Money. So don’t be surprised if you hear newbie or veteran contractors singing the odd praise of Mr Osborne.
Help to Buy ISA
First time buyers to get help from the government to save for a deposit on a house, for every £200 you put in to the ISA, the govt will put in £50. Up to £3,000 in govt funds are on offer!
This is a massive boost to the millions of young Britons who are desperately trying to get a foothold on the property ladder. It’s a relief to finally see the coalition targeting these long-neglected constituents, rather than the ‘grey’ vote that they have focussed on to date.
Contractors who are first-time property buyers will be able to start saving in these special ISAs in Autumn 2015; you will need an initial deposit of £1,000 to open a ‘H2B ISA’ and can use it to save for homes worth up to £450,000 in London, and £250,000 in the rest of the UK.
A fully flexible ISA
Savers will have complete freedom to take money out and put it back into their ISA without losing their tax entitlement.
It has long been a bug bear for contractors that if they take money out of their ISA, they lose it from their allowance for that year and can never again benefit from the tax free growth on that sum.
Mr Osborne has finally seen the light and announced moves to a more flexible system that will enable savers to withdraw funds and then invest them again within the same tax year, without affecting their annual allowance or losing the opportunity to benefit from tax free growth on the funds. In short, keep your tax-wrapper while you dip in and out!
We think this will revolutionise the ISA market, especially on top of the changes made in Budget 2014, which saw the NISA introduced and a new flat allowance of £15,000 that will extend further to £15,240 next year.
Tax free savings
Basic rate taxpayers will be able to combat low returns on cash savings thanks to a £1,000 tax-free allowance on any returns on savings held outside of an ISA. Higher rate tax payers will benefit too, but from a reduced allowance of £500.
We expect that many contractors that are paying basic rate tax will decide to divert more of their ISA allowance into equity-based investments. This is so they will benefit from the best of both worlds, as long term growth on the ISA will be tax free and any savings held in cash can now be left to grow tax efficiently in a high street bank account too.
Under Budget 2015, the lifetime pensions allowance has been cut to £1million from £1.25million from next year. No change to the annual allowance fortunately.
The reduction to the lifetime pensions allowance to £1m could hit contractors who are investing up to the full annual allowance of £40,000 each year, as they would reach this limit after 25 years of investment even without allowing for growth.
Osborne also proposed to index the lifetime allowance against inflation from 2018. That’ll help protect you as a contractor if you’re still building up your pension.
Even better news though is that the rate of tax relief and the annual allowance remain unchanged. Whilst the lifetime limit changes will hit top earning civil servants and big business executives, we actually see the impact as being relatively limited on the contractor and freelancer community.
Of far greater concern would have been a restriction to the annual allowance because, typically, a freelancer or contractor will need to play ‘catch up’ when their micro-business becomes more established, and so a lower cap on contributions could have caused real difficulties for our older clients.
Due to rise from £10,000 to £10,600 from April this year (and then to £11,000). To be passed onto higher rate taxpayers too and overall will represent a tax cut for 27 million people.
The personal allowance rising is due to leave 430,000 Britons paying no tax at all! Next year, the allowance will increase to £10,800, and then £11,000 in the following year.
As mentioned, higher rate tax payers will also get a boost this time as the threshold is set to rise above inflation rather than in line with it, increasing from £42,385 this year to £43,300 by 2017/18, so contractors can take home more of their contract rate.
Cash for Annuities
Consultation now open on proposals to allow retirees to sell their current annuities and take advantage of the new pension flexibility rules to cascade wealth down through the generations.
Exactly how this will work remains to be seen. However initial proposals suggest that annuities will not be able to be sold back to the original provider. The Treasury is taking consultation on who should be allowed to purchase annuities from retires as there is concern that it would not be suitable for retail investors, due to the complex nature of this type of investment.
We are pleased at the move but caution will need to be exercised where a guaranteed income for life is required, because it will potentially be difficult to replicate that guarantee with many alternative investment strategies.
The issuance of even more long dated gilts (announced at Budget 2015) is a very sensible move given current low interest rates. It’s far better to lock govt debt servicing into what could be a non-repeatable low cost!
Osborne chose not to highlight the Tory election pledge to reform inheritance tax rules, but instead said “we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation”.
This follows reports this week that if they win the vote in May, there could be a new tax-free band of £175,000 per person for a main residence which equates to a maximum of £350,000 for a married couple towards the family home. This would be added to the current threshold of £325,000 up to which no tax is paid so in total, a married couple could pass a property worth £1million to a direct descendent (including step children and adopted children) completely tax free. This would offer a welcome relief to contractors with large family homes or even a modest terrace in some areas of London, as your children could inherit without any of the tax complications that would currently strip back the value of your estate.
Another freeze, helpful to families and ‘on the road’ contractors
The fuel duty increase that was expected to come in September has been cancelled in the longest freeze in fuel duty in over twenty years. The chancellor boasted that this will save the average family £10 every time they fill up.
Less pain for pint-drinkers and their Scotch mates
Duty on beer will be cut by a penny per pint and Cider, Scotch whisky and other spirits will be cut by 2%. Bad news for wine drinkers though, as their tipple will remain at its current level.
In Osborne’s speech, he didn’t shy away from the fact that there is still work to be done and that the economy remains far from stable. Instead, he played on the question of whether or not the country can trust Labour’s Ed Balls to pick up where he may be forced to leave off. With only 50 days to go to the general election, this was a very political Budget -- as we expected.
‘The most prosperous nation in the world’
The above statement was Mr Osborne’s final battle cry in his last Budget for the current coalition government. As I hinted at the introduction, there were positives at both ends of the contractor lifecycle -- Help to Buy ISAs for junior contractors eyeing their first home, and changes to annuities for retired contractor veterans. Moreover, the smattering of other enablers to prosperity he offered don’t seem cornered off to the contractor community.
The chancellor also said: “We have a plan that is working and this Budget works for you.” Well, overall; I have to agree with him. It remains to be seen whether the professional freelance workforce are in agreement too but, just like voters up and down the country, they’ll probably go some way to letting him know, one way or the other, on May 5th.