Contractors' Questions: How to build an IR35 reform warchest?
Contractor’s Question: Is there really no such thing any longer as a high interest current or savings account? My accountant hints that there’s not. I want to stash cash away for eight or so months to let it grow, and won’t need to access it before April 2020, at the earliest. So yes, you've guessed it; an IR35 reform warchest! What’s my best option to start building a financial buffer for then?
Expert’s Answer: Given the current Bank of England base rate, it is difficult to find a decent rate of return for funds that are held in liquid accounts. There are certain firms out there that will search the whole of the market for you to find the best rates, and some of these include fixed term holding accounts for certain time periods up to a year that will offer a slightly better rate of return to try and inflation-protect some of your funds if you are looking to build up a ‘warchest’ for next April. With some of these accounts you can also retain the funds within the business, rather than have to draw them and incur a further income tax liability.
Your best bet would be to look at these short-term fixed savings accounts if the money is held within the business. And positively because they are cash accounts, they generally don’t have a fee or, if they do, it tends to be very low -- around 0.22% p/a.
Alternatively, if the money is going to be held personally, potentially look at options such as ISAs, to take advantage of the ISA allowance you have. Given the short-term that you are talking about (there are now less than 250 days until IR35 reform is due to bite in the private sector), you would have to restrict your search to a Cash ISA, as if you market-link an investment you should really be looking to invest for at least five years to give time to ride out market volatility.
With an ISA or short-term fixed savings account in place, you can really start preparing yourself, in other ways, for the strong possibility that IR35 will be implemented in the private sector. But if you go down the short-term fixed savings account route, remember to leave good time to explore how you will remove funds from the business. Also consider if pensions or other investments could be used to diversify your savings strategy. Good luck!
The expert was Duncan Craze, senior financial planner at Contractor Wealth.