Budget 2016: contractors' personal finance review
Contractors may be wary of this chancellor’s past Budgets but just moments after yesterday’s statement began, they heard him extol the virtues of ‘helping people keep more of the money they earn.’
Sounding more like a shrewd financial planner for contractors than a politician, George Osborne at Budget 2016 almost came close to stepping on our toes, writes Sat Singh, chief executive of Contractor Money, an Independent Financial Adviser to contractors.
Fortunately for the image of financial planners everywhere, Mr Osborne showed he’s no fly-by-night adviser. He trumpeted long-termism and the merits of ‘acting now to save paying tomorrow.’ Indeed, for most contractors, our initial calculations suggest planner Osborne deserves a testimonial because with him your personal finances as a contractor seem on track to increase more than decrease. And that’s the case even once George has taken his fee from you; transparently or not!
Pensions not pillaged
In a surprise turnaround, pension limits were untouched by the chancellor in Budget 2016. So mounting fears of further meddling, or an out and out reform of the pension system in a bid to remove complexity and cost for less sophisticated savers, came to zilch. So your lump sum is going nowhere near the Treasury coffers, seemingly because planner Osborne smelt the coffee and realised his paying punters (you and me) were none too pleased at suggestions made by his old office colleague Steve Webb.
In a further defying of expectations, Osborne introduced us to a simple alternative savings arrangement called a Lifetime ISA. This new ISA will be available from April next year. It will offer savers under the age of 40 the ability to save £4,000 per year with a government top-up of £1 for every £4 deposited by the saver, effectively ‘grossing up’ the contributions for basic rate tax payers and offering many contractors a more flexible aside to pensions.
Introducing LISA (continued)
Full details of the new scheme will be announced following a consultation. But for now, it’s expected that the slickly-named LISA – clearly planner Osborne’s shiniest financial product of yesterday - will offer penalty free withdrawals. This is due to be the case not only at retirement, but also if the funds are used to purchase a home. If that’s your plan, consider that you can extract your capital tax-free to buy a starter-house up to a value of £450,000 (conditions apply).
The key for the chancellor and his staff during a consultation on LISA will be in communicating this new financial product to his potential buyers (us) and keeping it simple, so we all know what we’re getting and how it works.
Like any good money maestro though, Osborne didn’t forget about the products he’s already got in his punters’ portfolios. So he gave conventional ISAs a bigger than expected boost, with an increase in the annual limit from £15,240 to £20,000 from next year. So contractors are being offered even more scope to save in a tax-smart manner.
Smattering of personal tax treats
With April looking particularly showery for umbrella contractors, Budget 2016 gave them a little shelter yesterday, even if it probably was indirect and unintended. Still, these hard-workers who pounds planner Osborne has hurt will benefit from a jump in the annual tax free personal allowance to £11,500 from April 2017 and, potentially, an increase in the threshold at which higher rate tax is payable to £45,000.
His tax treats didn’t end there. Tax on the disposal of assets was also curbed, as was the headline rate of Capital Gains Tax.
Insurance increase isn’t ideal
Less positively, contractors who drive cars, pay mortgages or need insurance for their contracting assignments will be slower to recommend assets adviser Osborne. For the many contractors occupying these ubiquitous financial positions, he gave insurance taxes a battering for the second year in a row. It means that Insurance Premium Tax, which is payable on the vast majority of insurance premiums, is set to rise from 9.5% to 10%.
But the rise is small, and insurance premiums have been on a steady decline recently so the impact on contractors should be only slight. Cushioning you further is the fact that contractors can offset this cost (in many cases) by funding business and certain personal insurances, such as life insurance, through their limited company as a tax deductible expense.
Mentioning ‘cushions’ reminds us of a few moments during his speech yesterday where Osborne could have probably done with a sit down. In fact, bar a handful of metrics which he struggled to talk up, the news from the Office for Budget Responsibility is painting a picture of an economic recovery which may be losing momentum.
Headline growth rates have been revised down to 2% in 2016 and the UK's borrowing, while falling in monetary terms, is set to rise as a proportion of the economic output as a result of a downward revision in the UK's GDP, the cash value of the UK's economic output.
But don’t despair too much. This uncertainty might not be bad for contractors; it might even be good. Uncertainty for hirers, clients and organisations in need of staff for projects and programmes has long shined a spotlight on temporary labour resources— those staff that can be taken on – and let go – as demand fluctuates and as budgets allow.
At the pubs and pumps
However, if the doom-mongers get the better of you, there’s one Budget announcement that is tailor-made for your sentiments. So pop to the pub, because alcohol duty on beer, most ciders and whisky has been frozen!
Another freeze is on fuel – a resource contractors use that many commentators said was bound to increase in price, despite five years of it doing the reverse. This relief at the pumps coincides with the announcement that, from 6th April 2017, the Fuel Benefit Charge multiplier for both cars and vans will increase by RPI. Also affecting contractors on the road, company car tax incentives have been announced for greener vehicles and £38m was also poured in yesterday for R&D grants on low-emission vehicles.
Smokers were harder hit. Tobacco duty notched up by 2% above RPI last night, and duty on hand-rolling tobacco rose at the same time by an additional 3% above this rate to 5% above RPI.
So if you’re a contractor who rolls your own cigarettes; is heavily insured and has a bet on stellar economic growth for the UK this year, then this Budget will be a blow. As mentioned earlier, our initial sums based on Osborne’s figures -- and his financial planner-style approach -- should strike a chord with most contractors, and make us believe that Budget 2016 was a relatively pleasing statement for the UK's contractor community. Among contractors, there’ll not be many firework parties this weekend but there shouldn’t be too much malaise either.