Mini-Budget 2022: How contractors benefit financially
Friday’s fiscal event from new chancellor Kwasi Kwarteng was billed by the also new Liz Truss-led government as a ‘Mini-Budget.’ But it was anything but ‘mini!’
It contained the massive news that IR35 reform of April 2017 and April 2021 is going to be repealed from April 2023.
So forget ‘mini’ anything. This was a big, Conservative libertarian budget, containing £45billion in tax cuts, designed primarily to stimulate and boost growth in the UK economy. It was all very much in line with Tory values and contained some very large seismic shifts in fiscal policy, which we will uncover for contractors below, writes John Yerou, CEO of Freelancer Financials.
Stamp duty cut
The cut to stamp duty (or to give it its formal name Stamp Duty Land Tax – ‘SDLT’) didn’t come as a surprise to those of us working in the mortgage industry. It’s been on the horizon all week and reform to the tax has been called for in the past.
Under the existing system there isn’t any stamp duty paid on the first £125,000 of any property purchase. Thanks to Mr Kwarteng, that threshold will increase to £250,000. And for first-time buyers whether contractors or not, the stamp duty threshold will increase from £300,000 to a new £425,000. In addition according to the chancellor, the value of properties upon which first-time buyers can claim relief will also increase from £500,000 to £625,000.
The upshot? Well, it means that first-time buyers won't have to pay any stamp duty on the first £425,000 of a property's price, provided that the property costs less than £625,000. Previously, the additional first-time buyers' relief only applied if the property cost less than £500,000.
Stamp duty calculation for first-time buyer
For example, if you’re a first-time buyer purchasing a property valued at the new £625,000 threshold, you will pay £10,000 in stamp duty. Your effective stamp duty rate is 1.6%. This is because you pay no stamp duty on the first £450,000, 5% on £425,001 to £925,000, 10% on £925,001 to £1,500,000, and 12% above £1,500,000.
Stamp duty saving for non-first-time buyer
Now let’s take the example of a home-mover and contractor Mark, purchasing a property valued at £625,000.
Well, Mark would have to pay £18,750 in stamp duty. His effective stamp duty rate is 3%. This is because Mark pays no stamp duty on the first £250,000, 5% on £250,001 to £925,000, 10% on £925,001 to £1,500,000, and 12% above £1,500,000.
The stamp duty changes (which apply in England and Northern Ireland) were announced on Friday with immediate effect from midnight.
Here are the new stamp duty rates (applicable on main residence):
|Up to £250,000 (or £425,000 for first-time buyer)||Zero|
|£250,001 to £925,000||5%|
|£925,001 to £1.5 million||10%|
|1.5 million and above||12%|
Looking at the rates, current and future property buyers can breathe a huge sigh of relief, because the previous stamp duty ‘holiday’ model has been replaced with permanent changes. And a much more user-friendly regime for ordinary buyers.
We believe the stamp duty cut will undoubtedly support many first-time buyers and home movers on lower incomes by offsetting increasing mortgage rates and rising house prices. But a number of property experts are warning that the chancellor’s SDLT cut is going to stimulate demand in the property market further, at a time when it is already vastly outstripping supply, with the effect that property prices are going to rise further.
My take is that the government understands that the only way to truly support the housing market in the long term is to stimulate supply, so it has better balanced demand, with affordability as the natural outcome. In this sense, the proposals announced by the government to reform the planning system are exactly what’s needed.
It is also hoped that the reform will increase the number of older homeowners downsizing, with the effect it frees up larger property stock.
The home is a major asset for contractors just like it is for any other taxpayer. But contractors also need to look at Mr Kwarteng’s changes to NICs, corporation tax, dividends, and income tax, as they stand to be affected by all four of these much more than the average HMRC customer.
National insurance contributions increase reversed
In advance of the mini-Budget, the chancellor confirmed the much-expected U-turn of former chancellor Rishi Sunak’s National Insurance Contributions increase.
On earnings over £12,570 a year, National Insurance will drop from 13.25% to 12%. The government estimates 28million people across the UK will keep an extra £330 a year in their pocket (on average), following the cut.
But the NICs reversal has been criticised by many commentators, as it will help those on higher incomes much more than those on the lowest. Estimates show it will only save lowest income households a paltry 63p a month. The reversal will take place on November 6th 2022.
The other big reversal from Mr Kwarteng relates to the same amount – 1.25 percentage points – and it concerns dividends. So from April 2023, the increased dividend tax which stung contractor-directors from April 2022 will be removed, apparently making 2.6million individuals better off with an average saving of £345.
Corporation tax hike cancelled
The chancellor at his (so-called) Mini-Budget also cancelled the planned rise in corporation tax. Thanks to Mr Sunak, the tax was set to increase up to to 25% from the current level of 19%. This is obviously welcome news for contractors working through personal services companies who would have been hit (if their profits exceeded £50,000).
Income tax shaved earlier
The chancellor said on Friday that the majority of taxpayers will pay one penny less in income tax from next April.
This cut in the basic rate of income tax from 20% to 19% (which applies to annual earnings between £12,571 to £50,270) was due to apply anyway. But Mr Kwarteng brought it forward. In a related move which high-end contractors will welcome, the 45% highest tax band for individuals earning more than £150,000 a year was scrapped.
A giveth and taketh away Budget, of a different kind
At the time of writing, it’s fair to say the markets and some economists look less than convinced but no matter what you hear about this budget, from a contractor’s perspective, it was surprisingly positive. Even when you disregard the monumental, historic and hugely helpful decision to revoke IR35 reform, the chancellor’s big financial moves (outlined above) were all contractor-friendly. Future budgets will tell us if it was intentional on Mr Kwarteng’s part to help out the independent worker and back the one-person business. But for now, with too many Budgets in their past to remember that have ‘giveth and taketh’ away from them, contractors will return the favour, by more than taking this one and even possibly giving a bit of thanks.