What Autumn Statement 2013 means for your money
What was fiscally-neutral for the UK yesterday won’t necessarily be the same for contractors, so let’s explore where Autumn Statement 2013 - the chancellor's 'mini-budget' - could leave you better or worse off, writes IFA Tony Harris of ContractorMoney.
Keep more of what you earn
If you’re interested in stashing your cash away from the taxman in an ISA, then there was some good news. Not only did George Osborne resist the much-feared lifetime cap on ISA investment, he also confirmed the maximum allowance next year will be increased to £11,800, up from £11,520 this tax year.
Half of this incoming total of nearly £12K can be saved in a cash ISA, meaning there’s a safe place if you’ve got £5,940 to hand. But do shop around for the best deal because rates on cash ISAs still remain stubbornly low.
Aside from silencing those who want to stem the rise of so-called ‘ISA millionaires’, this move by Mr Osborne to stay on the well-trodden path of raising the ISA allowance with the CPI extends to Junior ISAs and Child Trust Funds. There was no move to let CTSs be transferred to Junior ISAs, which would have been nice, but the limits on both these saving vehicles will shoot up to £3,840. So overall, as far as ordinary savers are concerned, the chancellor is sending the right signals.
Building that nest egg
For other contractors who like to invest, there’s fresh incentive to consider UK domiciled Exchange Traded Funds, as Osborne announced these will be exempt from stamp duty. A lot of contractors use these low cost investments via their SIPP, so contractors will join product providers and the City as the beneficiaries of this welcome move.
Elsewhere for contractors who are pension savers, specifically those reaching retirement, Autumn Statement 2013 was reassuring. In particular, the Treasury’s review in March of income drawdown rules has had many on edge. Fortunately, officials have concluded that they are a ‘reasonable match’ to annuity rates, so drawdown will likely remain the favoured option of those nearing the world of work’s exit than buying a rigid income via an annuity. The decision to leave the current rates where they are will come as a relief to many a contractor.
The picture’s less positive if you’re relying on the state for your pension, because Osborne said the age at which you can claim it will increase to 68 in the mid 2030s, and 69 in the mid 2040s! We’ve always advised contractors to actively explore personal provision and the chancellor really is helping us to stand by our advice.
True, the state pension is heading in the right direction. And yes, it’s good that an invitation was yesterday extended to the self-employed to make voluntary NICs to boost their income in retirement. However, we maintain that the pots on offer from the state remain woefully inadequate.
But contractors sorting out their own pension can’t afford to sit back. In fact, we recommend that contractors actively make contributions now ahead of two significant, incoming cutbacks:
- The tax-free pensions allowance has been due to fall from its current level of £50,000 to £40,000 in April 2014; and
- the lifetime allowance will also drop from £1.5m to £1.25m
These two changes will sting contractors who make full use of their allowance each year. The positive, if there is one, is that yesterday saw no nasty surprises around pension tax relief. Still, don’t delay - get contributing.
Your income before tax - on the up?
Meanwhile, given the relentless press coverage of Nick Clegg’s call to hike the personal income tax allowance, it was surprising and almost certainly disappointing for him, that Autumn Statement 2013 fell short. Osborne merely reminded us that the amount of money you can earn before tax will notch up to £10,000 in April next year.
Unfortunately for the well-heeled contractor, the costs of increasing the income tax threshold at the bottom will fall heavy on the shoulders of those further up the income ladder. In the 2014/15 tax year, the 20% basic income tax rate will apply to anyone earning between £10,000 and £41,865, above which it will increase to 40%. In future, this threshold will only increase by 1% each year, which will result in more middle earners being pulled in to the higher rate tax bracket.
So maybe it’s time you get hitched? That’s because one civil partner or spouse can soon transfer £1,000 of their personal allowance to the other, as long as neither is a higher rate taxpayer and one is earning less than the personal allowance.
This will apparently benefit around four million couples with a tax saving of up to £200, at a cost to the Treasury of aroundy £700m a year. However, it still needs to go to a vote in the House of Commons so it remains to be seen whether even this modest tax incentive ever comes to fruition. Unfortunately, due to the caveats surrounding the marriage relief, it is unlikely that many contractors will benefit.
Help to Buy
One area where contractors certainly are benefiting is Help to Buy, which we consider to have had a lucky escape in the Autumn Statement.
This is because after last month’s surprise end to Funding for Lending (as far as home loans are concerned) , there has been much speculation in the press that the chancellor was going to have to curtail Help to Buy amid housing bubble fears.
We are pleased that Osborne stuck to his guns and didn’t cave in to the sceptics; Help to Buy has injected some much-needed life back in to the housing market and will continue to do so over the next three years. Since the scheme came in, we have already seen some contractors complete on their Help to Buy purchase and move in to their new home. More self-employed professionals will no doubt join them in 2014.
On the move
Getting the train will soon be less painful than it was shaping up to be. Under Autumn Statement 2013, ticket price hikes will be capped to increase with inflation rather than the proposed increase of 1% above inflation. So average fares for your commute next year will be cheaper than if Osborne had done nothing.
Drivers got relief too. The planned fuel duty rise that was due to come in next year has been cancelled, so petrol will be 22p cheaper than it would have been if Labour’s planned increases had gone ahead. In short, the freeze to fuel duty will effectively save you £11 every time you fill up.
Any good news for your bottom line thanks to the Autumn Statement has to be tempered by the fact that Bank of England Governor, Mark Carney, has stated that a return back to 7% unemployment would be the trigger to review interest rates. In his statement, Osborne forecast that the drop to 7% unemployment should be reached as early as 2015. As a result, we anticipate heightened interest in remortgaging next year, when contractors will be eying long-term, fixed rates ahead of a return to more normal bank base rates and, unfortunately, dearer borrowing costs.