Contractors' 2014 financial calendar - Q1 & beyond

Contractors might have only just finished packing away the Christmas decorations, but a host of changes to the finances of such self-employed professionals loom large, writes Tony Harris, an IFA at ContractorMoney.

Some of these incoming changes are tied to the calendar. For example, the January 31st deadline for self-assessment taxpayers, and the new financial year commencing in April.

But others are down to the chancellor George Osborne who, on top of his warnings in Autumn Statement 2013, last week cautioned that the UK faces a year of hard truths in 2014, and “no easy options” beyond that.

Fortunately, the staple financial diet of most contractors – made up of mortgages, ISAs, banking and pensions – shouldn’t be affected by the £25billion in spending cuts that Mr Osborne pledged to make after the general election. Nonetheless, each of these financial ingredients deserves a closer look, not least because they will be shaken up by his previous announcements, imminently:

Contractors’ 2014 financial calendar – Q1 & beyond

January

  • Help to Buy (phase two) - the ‘Mortgage Guarantee’ - officially launches

February

  • Funding for Lending ends for home loans (but still exists for business loans)

March

April

  • 2014/15 tax year begins
  • Income tax personal allowance is increased to £10,000
  • Higher rate tax threshold increases to £41,865
  • ISA allowance goes up to £11,880
  • Pensions annual allowance changes to £40,000
  • Pensions lifetime allowance changes to £1.25million

 

As the top of the table shows, the government will this month officially launch phase two of the Help to Buy scheme in the shape of the Mortgage Guarantee (MG). In short, the MG will allow contractors to buy a house with a deposit of just 5 per cent.

The Mortgage Guarantee - explained

The scheme was available on early release from October 2013, but the funding will only be available from this month, meaning those contractors who have already had offers on property accepted will now be able to get the ball rolling in earnest.

Unlike phase one of the scheme, which was available on new build properties and involved taking out a 20% loan from the government and a 75% mortgage from a participating lender to purchase with a 5% deposit, phase two sees the lender apply for a guarantee from the government on up to 15% of the property value. As a contractor who wants to take up the scheme, you therefore simply apply for a standard 95% mortgage. It is available on new and old properties up to the value of £600,000.

More about the state’s mortgage schemes

Help to Buy and its counterpart, Funding for Lending (FfL), have been effective catalysts for the housing market and last year saw movement on the property ladder increase beyond all expectations. With Funding for Lending coming to an end in February for home loans, there has been some concern over what will happen to mortgage rates in 2014. However the market has gathered such momentum over the last year that we don’t foresee the end of FfL for home loans being an issue.

A bigger concern is whether the government will decide to withdraw Help to Buy earlier than planned, in what would be an attempt to dampen down price inflation. We therefore recommend that contractors take early advantage of the schemes this year.

When you’ll be paying more interest on your mortgage

Meanwhile, but also potentially affecting those with mortgages – or those aspiring to secure one – is the Bank of England Governor Mark Carney. As we pointed out in our financial review of Autumn Statement 2013 for contractors, Mr Carney has said that unemployment coming in at 7 per cent would be the trigger to review interest rates, which currently stand at a historic low of 0.5 per cent.

When he issued this so-called forward guidance, he predicted that the 7 per cent threshold would be met around 2016. However, since then the economy has bounced back strongly and the unemployment rate has already fallen to 7.4 per cent, its lowest level since 2009.

So in our view, the 7 per cent threshold could be reached before the year and Mr Carney may therefore be forced to revise his initial timeframe – or threshold. Indeed, some analysts predict that the governor will reduce his unemployment threshold to 6.5 per cent, seemingly on the basis that he has expressed a keen interest in giving the economy time to fully recover before increasing the base rate.

It is a decision not to be taken lightly because raising the base rate would affect almost every working adult in some way. Higher rates would mean better returns on investments made by those contractors who have been saving, but they would be the only small minority to benefit. Investments by firms may be hit if interest rates rise, meaning there could be less work around at the same time as homeowners on their lender’s Standard Variable Rate, or Tracker Mortgage, would see their repayments increase, immediately. Contractors with loans or credit cards would also feel the pinch as debt repayments would also increase.

Remortgaging remains our recommendation

Therefore, and to guard against any increase in the base rate in 2014/15, contractors would be wise to look at remortgage options for two or five year fixed rates, to take advantage of the competitively low rates that are currently available. We anticipated this interest in remortgaging in December and initial enquiries to us so far this year suggest we’re not alone in seeing the sense in fixing.

Also to guard against any increase in the base rate, contractors using plastic should consider switching credit cards to one that offers a 0% balance transfer offer, as some lenders are offering up to 30 months interest-free credit.

Pensions allowances – changes a foot

In April, the annual allowance for pension contributions will fall from £50,000 to £40,000, in a move that will be unpopular among contractors who have been maximising contributions to benefit from generous tax reliefs. If you have retained profits in your limited company, then now is the time to transfer them to your pension so that you can make full use of the £50,000 allowance before the April 5th deadline.

In the same month, the lifetime allowance on pensions will fall as well - from £1.5million to £1.25million, which will catch out more contractors than many think. If, as a contractor, you have been making use of the annual allowance each year, then this decrease may mean you easily find yourself breaching the lifetime cap when you come to retire.

It won’t be all showers in April if you invest

The annual allowance for ISA investment will increase by £360 to £11,880 in April which will allow more scope for tax-free growth on your savings. If you haven’t already set up an ISA, then make 2014 the year that you embrace this tax-efficient savings plan and join those contractors who are well on their way to being ISA millionaires. But if you are already saving into an ISA, then don’t wait until April. In fact, January is a great time to take stock, review the market’s offering (including whether you want to switch your ISA) and check whether you are getting the best returns on your investment.

Don’t miss the finer points of ISAs

Remember, you can split your annual ISA allowance across both cash and equity ISAs, so you can be flexible with how accessible you want different segments of your investment to be. This means you can keep a ‘rainy day fund’ in cash that can be accessed instantly should the need arise and then invest your remaining allowance in an equity ISA for the medium to long term. Keep in mind that you can now invest in an even wider range of funds and asset classes using an equity ISA, so you should aim to review your portfolio to make the most of what many believe will be another bull market in 2014.

You can almost bank on changes at your local branch

In 2014, contractors will see monumental changes to the UK banking system, thanks to the Banking Reform Bill which was passed in December 2013. Under the new regulation, high street banks will be split from their investment arm which will ensure that taxpayers won’t have to pay out for any future bank failures. We are expecting further changes to come from the Banking Reform Bill in 2014.

Positively for your everyday banking, a new, faster, easier way to change banks has also been launched under the ‘Current Account Switch Service’. This should encourage many of the high street banks (and building societies) to shake up their current account range and offer more competitive rates and better incentives to encourage consumers to switch. It is certainly worth reviewing your current provider in light of these changes to ensure your money is working hard enough for you.

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