What Budget 2014 means for contractors' pockets
Hearing from the chancellor as the UK did yesterday that “in this Budget all decisions are paid for” won’t comfort contractors if they’re the ones who end up footing the bill but, fortunately, he had their financial interests at heart, writes ContractorMoney’s Tony Harris.
That’s not the only way George Osborne broke the mould on March 19th, 2014. In fact, unlike his four previous Budgets, the MP for Tatton kept most of the contents of his red box a secret until the seconds after he stood up.
As a result, wide-reaching changes to pensions and savings that he announced took his fellow MPs, industry experts and the rest of the country by complete surprise. In total, he made 11 shout-outs to “savers” and even partly dedicated the Budget to them.
Individual Savings Accounts (ISAs)
One of the biggest cheers Mr Osborne got yesterday – from me and those in the House of Commons – was from his revelation that investors will be allowed to transfer a stocks and shares ISA into a cash ISA, as part of New ISA (NISA) rules.
This is truly a ground-breaking move, as it means contractors nearing the date when they want to release their savings, for whatever reason, can transfer their funds to the relatively low risk wrapper of a cash ISA. This means they can relax in the knowledge that any short term fluctuation in the markets will no longer impact their investment.
It’s always been possible to do this with Junior ISAs but, until now, has never been applicable to adult ISAs. It really will bring a huge amount more flexibility for savers and will be welcomed by contractors.
Even more cheering MPs then sprang to their feet, when the chancellor announced that also under the NISA, savers will be able to invest up to £15,000 in to an ISA per year (from July 2014). This will be a single allowance for all ISA investments, whether the funds be invested in cash or stocks and shares.
This is game-changer for cash savers who were previously limited to investing only half of the existing ISA allowance at £5,760 in a cash account. It will be especially helpful to first-time buyers saving for a deposit who don’t want to risk the volatility in a stocks and shares ISA, but who do want to be able to save more each year to fund their purchase.
But not forgetting Junior ISAs, Mr Osborne added that their ISA allowance will also increase to £4,000 from its current level of £3,720. This is a boost for contractors trying to save in a tax-free way towards their children’s future.
Personal allowance up – but this year higher rate payers can rejoice
The other increase the chancellor unveiled, albeit to less applause because it was widely expected, was to the personal tax-free allowance. So the amount of money one can earn before paying tax (at 20%) will rise from £10,000 to £10,500 from April next year, just before the election, in what is a sweetener for voters.
No doubt professional contractors would have liked the chancellor to have gone further. Though this year, such well-heeled freelancers really can rejoice because the full benefit of the threshold increase will be passed on to higher rate taxpayers, meaning contractors will be caught by the 40% tax band on less of their income. This year the threshold for paying 40% tax will increase by 1% (as of April) from £41,450 to £41,865.
Help to Buy extended to 2020
Positively for contractors eyeing property, the chancellor confirmed that the government has committed to investing another £6billion into the Help to Buy initiative, which was originally due to come to a close in 2016 but will now run until 2020. It is estimated that this will see another 120,000 new properties built in the South East over the next six years. This new funding will be put into the equity loan part of the Help to Buy scheme, but will not be extended to the Mortgage Guarantee, which will still run for its intended time scale of three years from January 2014.
Pension Savers – Osborne’s new best friends?
With all his talk of savers, Mr Osborne ran the risk of upsetting some of the most prudent preservers of cash – pensioners. He’s already told them their lifetime allowance will drop from £1.5m to £1.2m on April 5th 2014, and that their annual allowance will fall from £50,000 to £40,000 on the same date.
But yesterday in his Budget 2014 speech, he dramatically turned his relations with those building nest eggs around in just a few lines.
“We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots,” said the chancellor.
“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”
A new dawn for Pensions
So rather than limiting the 25% tax free lump sum that savers can currently withdraw from a pension as early as age 55, as was rumoured pre-Budget, Mr Osborne has actually unveiled major improvements to how and when pension benefits can be accessed.
He has given the power back to the people and embraced the notion that savers can be trusted to make sensible choices in their regarding of how they access their post retirement funds.
A brave new world for savers
For those contractors who have old legacy 'defined contibution' money purchased pensions from previous employers, from 2015 gone is the requirement to transfer to a personal pension or otherwise risk having to buy a rigid annuity based income.
Instead, having taken up to 25% of your fund as tax free cash under current rules, you will then continue to have the existing options of:
- buying an annuity,
- transferring to a personal pension ‘drawdown’ arrangement,
- encasing your pension subject to a tax charge.
If you choose the latter option you will avoid the 55% tax charge that used to be levied on personal pensions encashment and instead have these funds simply added to your earnings and subject to income tax instead.
Interim measures for Personal Pensions and SIPPs
The chancellor also implied that these new encashment rules will be applied to personal pensions too.
In the meantime, a raft of measures will come into force to release many of the constraints that currently apply to personal pensions.
‘Flexible drawdown’ currently allows clients with £20,000p/a guaranteed income from final salary and state pensions, to draw out their full fund, subject to income tax at the marginal tax rates. This guaranteed limit now falls from £20,000p/a to £12,000p/a.
In addition, so called ‘triviality rules’ have been relaxed, irrespective of the presence of guaranteed income.
And current rules allow the encashment at age 60 and above, subject to 25% tax free cash and then income tax, of two pensions up to £2,000 in a lifetime and these are now being moved up to three pots of up to £10,000.
Ignoring the small pension pot rules, additionally an overall fund value triviality limit is now in place at £18,000 and this is being increased to £30,000, meaning a contractor with total funds of £29,999 will be able to access this entire fund -- 25% tax free and the balance subject simply to income tax.
Finally, those of our clients who prefer not to buy a rigid annuity with their personal pension and instead transfer to a standard, ‘capped drawdown’ arrangement, currently have their maximum income restricted to 120% of government ‘GAD’ income limits. These limits are being changed to 150% of GAD, so contractors will be able to draw more from their fund even though gilt yields remain stubbornly low.
Plus points, overall, for George on pensions
Despite us warning him in the run-up to the Budget against tinkering with pensions, these changes from Mr Osborne will make a significant and positive difference to those saving for retirement, and we expect financially-shrewd contractors to exploit them at the first opportunity.
As mentioned previously, perhaps the only fly in the ointment is the incoming cut to the lifetime and annual allowance for pension savers, effective from April 5th 2014. Our advice to concerned contractors is -- if you have a lump sum to invest then make sure that you have done so in plenty of time to avoid paying tax on any overpayment.
At Budget 2014, the chancellor empowered the nation by giving the green light to savers of all ages to take control of their own futures. He said this was “a Budget for makers, savers and doers” and “you’ve earned it, you’ve saved it, this government is on your side.” Well, we’re delighted to say he certainly lived up to the rhetoric and we expect savers to seize on this unique stimulus in savings.
The author, Tony Harris, is an independent financial adviser specialising in the affairs of contractors, freelancers and the self-employed.