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Guide written by Contractor Financials

With Government finances still tight no one was expecting fireworks from George Osborne’s last Budget before the 2015 General Election however he has had the ability to pull the proverbial rabbit out of the hat in his last two budget speeches to the House of Commons, with pension’s reform this time last year and the stamp duty overhaul in the Autumn Statement.

So it is perhaps no surprise that, despite the restricted room for manoeuvre, the Chancellor still managed to pull out a few interesting sweeteners which should benefit the Contractor community writes Tony Harris of specialist IFA ContractorFinancials.

The 2015 Budget at a Glance

  • Help to Buy ISA’s - first time buyers get help from the Government to save for a deposit on a house, for every £200 you put in to the ISA, the Government will put in £50.
  • A fully flexible ISA - people will have complete freedom to take money out and put it back in to their ISA without losing their tax entitlement
  • Tax free savings - basic rate taxpayers will be able to combat low returns on cash savings thanks to a £1000 tax free allowance on any returns on savings held outside of an ISA. Higher rate tax payers will benefit too but from a reduced allowance of £500.
  • Pension’s allowances - the lifetime pensions allowance reduced to £1million from £1.25million from next year. No change to the annual allowance.
  • Personal allowance - due to rise from £10,000 to £10,600 from April this year. To be passed onto higher rate taxpayers too and overall will represent a tax cut for 27 million people.
  • Self-Assessment – Osborne scrapped annual tax returns in favour of digital records like online bank accounts that will keep an up to date record of the amount of tax you owe.
  • Travel expenses- Umbrella clients to face restrictions on what they can reclaim
  • Tax Evasion - further action against aggressive tax planning vehicles
  • Cash for Annuities - consultation starting today on proposals to allow retirees to sell their current annuities and take advantage of the new pension flexibility rules to cascade wealth down through the generations.

The Economic Outlook as we approach May 5th

The Tory/LibDem Coalition has struggled with an economy strangled by debt since it took over four years ago and George Osborne was rightfully proud of the steps taken to get the country back in to the black. GDP is up, in 2014 Britain’s economy grew by 2.6% “faster than any other major advanced economy in the world last year”. The Office for Budget Responsibility has revised its growth forecasts up to 2.5% for 2015 and then 2.3% for 2016 and 2017 which is better than was forecast just three months ago in the Autumn Statement and should feed into more demand and higher hourly rates for Contractors.

Unemployment is at a historic low with 1.9 million jobs gained and living standards have at last showed real signs of an increase across all earnings brackets. The debt forecasts are also better than expected “Debt as a share of GDP falls from 80.4% in 2014/15 to 80.2% in 2015/16”. In a dig at Labour, the Chancellor highlighted the fact that the top 1% of earners will be paying 27% of total income tax in 2015 up from 25% in 2010 to many jeers from the opposition’s benches.
But Osborne didn’t shy away from the fact that there is still work to be done and that the economy remains far from stable. Instead, he played on the question of whether or not the country can trust Ed Balls to pick up where Osborne may be forced to leave off in what was a very political Budget.

ISA’s get a facelift

The Help to Buy ISA

Help to Buy and ISA’s are unlikely bedfellows but George Osborne’s proposal sounds like a marriage made in heaven for first time buyers. The new breed of ISA will allow first time buyers to save for the deposit on their first home with help from the Government, for every £200 you put in to your ISA, the Government will put in £50 so you are effectively increasing your deposit by 25% for no extra hassle at all. This is a massive boost to the millions of young Britons who are desperately trying to get a foothold on the property ladder and it is a relief to finally see the Coalition targeting these long neglected constituents rather than the ‘grey’ vote that they have focussed on to date.

Contracting first time buyers will be able to start saving in these special ISA’s in Autumn 2015, you will need an initial deposit of £1000 to open a H2B ISA and can use it to save for homes worth up to £450,000 in London and £250,000 in the rest of the UK. Your £1000 you will benefit from a £250 uplift from the Government.

Overall this will be further positive news for the housing market starved of first time buyers with enough of a deposit to take that all important first step and should encourage a generation of new savers and we commend this to the house.

The new, fully flexible ISA

Alongside his new ISA for first time buyers, the Chancellor has also reformed the wider ISA market with his plans for a more flexible ISA regime. It has long been a bug bear for Contractors that if you take your money out of your ISA, you lose it from your allowance for that year and can never again benefit from the tax free growth on that sum. Osborne has finally seen the light and announced moves to a more flexible system that will enable savers to withdraw funds and then invest them again within the same tax year, without affecting their annual allowance or losing the opportunity to benefit from tax free growth on the funds. This will revolutionise the ISA market on top of the changes made in his last Budget which saw the NISA introduced and a new flat allowance of £15000 that will extend further to £15240 next year.
For the first time, savers won’t be afraid to dip into their ISA and this can only be a good thing for Contractors as you will be able to take money out if you find yourself between contracts and put it back in again when you start your new one without losing the tax benefits.

No tax on non-ISA savings income up to £1000pa

Basic rate taxpayers will be able to combat the low returns currently available on cash savings thanks to a £1000 tax free allowance on any returns on savings held outside of an ISA, saving 20% tax. We expect that many of our Contractor clients that are paying basic rate tax will decide to divert more of their ISA allowance into equity based investments so that they benefit from the best of both worlds as long term growth on the ISA will be tax free and any savings held in cash can now be left to grow tax efficiently in a high street bank account too.

Higher rate tax payers will benefit too but from a reduced allowance of £500 so that they don’t inadvertently benefit more from the cuts than basic rate tax payers.

We often see better headline non-ISA interest rates that will have historically then been reduced by tax but for many savers the returns will in effect all now remain gross and so comparing returns between all types of account will become far easier

Pensions under the spotlight again

Unlike last March when the Chancellor caught the pensions industry off guard, we had some pre-warning this year that there would be another step in Osborne’s ongoing reform of the pension’s rules and this time it was annuities that caught his attention.

Cash for annuities

There is going to be a consultation starting today on the Treasury’s proposal to allow retirees to sell their current annuities and take advantage of the flexibility that will be available from 5th April thanks to the pension reform introduced in the last Budget. Exactly how this will work, remains to be seen, but initial proposals suggest that annuities will not be able to be sold back to the original provider and the Treasury is taking consultation on who should be allowed to purchase annuities from retires as there is concern that it would not be suitable for retail investors due to the complex nature of this type of investment.

We welcome the Chancellors proposal as it seems unfair to prevent the thousands of retirees that are already locked in to an annuity to benefit from the sweeping changes to how you can access your income in retirement as the increased flexibility and the ability to drawdown multiple lump sums if required may appeal to some retired Contractors. The ability to cascade benefits down the generations should also be of great interest to some.

Caution will also need to be exercised where a guaranteed income for life is required however because it will potentially be difficult to replicate that guarantee with many alternative investment strategies.

Lifetime allowance takes another hit

Unfortunately it wasn’t all good news for pensions as the Chancellor announced that he will reduce the lifetime pensions allowance to £1million from next year which could impact on Contractors that are investing up to the full annual allowance of £40,000 each year as you would hit this limit after 25 years of investment even without allowing for growth.

This follows his initial reduction in the lifetime allowance from £1.5m to £1.25m last April and is likely to have been introduced to knock the wind out of the sails of Labour and the Lib Dems who had both pledged to make this cut if they win the election in May. Labour were planning to use this cut in the lifetime allowance to fund a cut in tuition fees so we will be watching closely to see how they propose to fund these cuts now.

In a surprise twist, Osborne proposed to index the lifetime allowance against inflation from 2018 which will help protect those Contractors that are still building up their pension and we were relieved to see the rate of tax relief and the annual allowance remain unchanged.

Whilst the lifetime limit changes will hit top earning civil servants and big business executives we see the impact as being relatively limited on the Freelancer community who will typically have missed out on gilt edged pensions of any substantial size whilst working as permanent employees. Of far greater concern would have been a restriction to the annual allowance because, typically, a Freelancer will need to play catch up when their micro-business becomes more established and so a lower cap on contributions could have caused real difficulties for our older clients.

Taxes are down for 27 million Britons

Personal allowance

The personal allowance is due to rise from £10,000 to £10,600 from April this year which will save 24.2 million Britons tax each year and leave 430,000 paying no tax at all. However the Chancellor went one better today and vowed to increase the allowance to £10,800 next year and then £11,000 in the year after next which will represent a tax cut for 27 million people.
Higher rate tax payers will also get a boost this time as the threshold is set to rise above inflation rather than in line with it, increasing from £42,385 this year to £43,300 by 2017/18 so Contractors can take home more of their contract rate.

Self-assessment tax returns join the digital age

It was a bad day for the legions of civil servants employed by HMRC to scrutinise self-assessment and handle calls from little old ladies paying tax on their savings income. 95% of savers will now pay no tax whatsoever on their interest (see below) and the tax return is dead.

The Chancellor set out the Tory’s plans to scrap annual self-assessment forms in favour of digital records like online bank accounts that will keep an up to date record of the amount of tax you have paid or is still outstanding. It will be opened up to all small businesses by 2016 and then will be introduced to individuals until everyone has been moved over to the new system.

All businesses in the UK and 55 million individuals will be using digital accounts by the end of the next Parliament if Osborne’s plan is seen through. This is likely to be welcomed by the Contractor community for whom self-assessment is often a painful and laborious process and frankly we are surprised that it has taken this long for the Chancellor to suggest this reform as almost all households now have access to the internet and the current system now seems archaic.

Inheritance tax

Osborne chose not to highlight the Tory election pledge to reform inheritance tax rules but instead said “we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation”. This follows reports this week that if they win the vote in May, there could be a new tax-free band of £175,000 per person for a main residence which equates to a maximum of £350,000 for a married couple towards the family home. This would be added to the current threshold of £325,000 up to which no tax is paid so in total, a married couple could pass a property worth £1million to a direct descendent (including step children and adopted children) completely tax free. This would offer a welcome relief to Contractors with large family homes or even a modest terrace in some areas of London as your children could inherit without any of the tax complications that would currently strip back the value of your estate.

Good news for demand for Contractors

The Chancellor unveiled a raft of ambitious measures which may offer a boost to Energy Contractors in today’s Budget including a new fiscal regime to boost job and exploration prospects in the North Sea which will include a “single, simple and generous tax allowance to stimulate investment at all stages of the industry”. The petroleum revenue tax will also be cut from 50% to 35% from next year to encourage continued production and offer some much needed relief to the oil industry who have been hit hard over the last year.

Similarly the creative industries received a further boost in terms of tax credits which should ultimately help further boost a key part of the UK economy, with film alone generating some £1.4bn last year.

Infrastructure spending also looks set to grow substantially which should result in greater need for specialist skills in construction and engineering.

Good news for all

Petrol prices

The fuel duty increase that was expected to come in September has been cancelled in the longest freeze in fuel duty in over twenty years. The Chancellor proudly boasted that this will save the average family £10 every time they fill up their car.

Creative industries

Osborne showed support for creative freelancers with generous tax credits for film, TV and video games industry and a new tax credit for orchestras. “Britain is a cultural centre of the world and with these tax changes I’m determined it will stay that way” said the Chancellor.

Friday nights out just got cheaper

Beer duty will be cut by a penny per pint and Cider, Scotch whisky and other spirits will be cut by 2%. Bad news for wine drinkers though as this will remain at its current level.

The most prosperous nation in the world

This was George Osborne’s battle cry in his final Budget for the Coalition Government. He said that “we have a plan that is working and this Budget works for you” and over all, we have to agree with him. There were positives at both ends of the Contractor lifecycle with the help to buy ISA offering much needed support to first time buyer Contractors while the changes to annuities offer welcome flexibility to retired Contractor veterans.

It remains to be seen what 5th May will bring and how much of Osborne’s plan ever makes it to fruition but we will be watching closely and will endeavour to keep you informed.