Budget 2011: an IT contractor’s financial review

Continued from yesterday

MORTGAGES

New help for first-timers

Another significant area of the economy which the 2011 Budget was right to address was the housing market and, in particular, the challenge facing first time buyers of getting on the property ladder. To this end, a £250million package designed to help 10,000 first-time buyers to buy a newly built flat or house was announced. The scheme will see the buyer putting up 5% of the cost and the government and home builder would both put up 10%.

Not enough on its own

However, this £250m investment is merely a drop in the ocean for the ailing housing market against the current pitifully low levels of house building. Unless the government can encourage more development they will be hard pushed to change the property market with this measure alone, no matter how welcome it is. To scratch the surface of the problem, and indeed for the initiative to succeed, it will also require lenders to really get behind first time buyers. And that may mean lenders have to rethink their lending criteria to base affordability on other factors for first time buyers.

The age-old position of contractors

For contractors eyeing a mortgage or re-mortgage in the near future, your credit history will majorly impact on your eligibility as determined by the lender. A few missed credit card payments could impact negatively on personal credit ratings, while County Court Judgements (CCJs) and or a bad credit history will almost certainly disqualify you from qualifying for the most competitive deals. This is worth remembering now that the traditional ‘self-cert’ deals are no more.

Property in later life

Inheritance tax makes passing on your estate less than straightforward, but Budget 2011 gives contractors an incentive to ‘do their bit’ for the ‘big society’ and a way to reduce the tax take following their death. This is thanks to the Budget announcing a scheme to redirect the 10% of a residual estate that would be otherwise have been paid in tax, to charity instead. Those interested would first elect to leave a minimum 10% of their estate to good works and the taxman would then give up his 10%.

This appears to be a genuinely inspired way to increase charitable contributions, particularly among those taxpayers with the largest estates. Mr Osborne expressed an interest in making charitable donations ‘the norm’ when it comes to inheritance, although he was keen to point out that no beneficiaries would emerge from this change.

INVESTMENTS

Buy-to-let

For contractors who are not just owner-occupiers of their property, Budget 2011 also unveiled some potentially interesting changes. So for investors and landlords alike, the government has announced a £7.5bn injection into the private rented sector with a reduction in the tax cost of buying multiple residential properties.

In line with the support, the chancellor also announced plans to review planning regulation in the UK to allow development of unused commercial property into residential units. The hope is that this may eventually help to introduce new properties in to the market that will appeal to first/next-time buyers, as well as buy-to-let investors.

Current climate

Contractors who are considering building a property portfolio should be encouraged by the non-Budget news that the first time buyer market is still a long way off anything resembling health, as potential homeowners are still being forced to bide their time in rental accommodation.

Back inside the Big Red Book and under capital gains tax, Entrepreneurs’ relief is to increase to £10m, providing welcome news for the few serious property investors with the largest portfolios, though the threshold is too steep for most novice investors. Still, it won’t be all fun and profits at the top end of the market – the government says it will clampdown on purchasers of properties worth over £1 million where the avoidance of purchase taxes is suspected.

TAXES, RELIEF AND ALLOWANCES

For entrepreneurs

Not to dissimilar to entrepreneurs’ relief, the government’s promise to lower corporation tax (by 2% from April) is another tax booster that contractors will invariably miss out on, as it only applies to large companies. But their small counterparts weren’t ignored in Budget 2011.

To help ease the pressure on the SME owner-manager, a 15% increase in the availability of small business credit was pledged, and the rate relief holiday for those with premises was extended (it will now end in October 2012).

For middle earners

Elsewhere, the government committed to the largest increase of the personal allowance in history, by agreeing it should rise by £1,000 in two weeks’ time. This means anyone earning under £35,000 will be better off.  In real terms, the Budget says, that equates to £160 extra per year for 23 million taxpayers.

Even better, there will be further increases to the amount many contractors can earn before paying tax next year when a further £630 increase (to £8,105) comes in from April 2012. The chancellor reiterated the coalition government’s wish to ultimately increase this nil rate band to £10,000 which, if realised, would make a significant difference to those on lower incomes.

For top earners

At the other end of the pay scale, the 50% tax rate introduced in April 2010 and proposed by Mr Osborne’s predecessor was addressed in the 2011 Budget. The current chancellor said that tax at 50p in the £1 for high earners was a temporary measure. But, quite correctly in my view, he believes it would be foolhardy to end this top rate immediately, as it is raising much-needed funds to balance the UK’s books. However Mr Osborne admitted that the 50p tax may potentially be a major disincentive for higher earners to live and work in the UK, and implied that it would be abolished as soon as circumstances allow.

For now however, the mere admission that the top rate is ‘temporary’ should inspire any contractor hit by tax at 50% of income to make use of the available relief, and professional advice, before the tax rules or salary brackets are changed again.

This is part 2 of a two-part guide, based on the comments of Tony Harris, founder of Contractor Money, an independent financial advisor to IT contractors. Part 1 reviewed the Budget’s announcements on Pensions, ISAs and Sin Taxes.