How Budget 2015 might hit or help your finances

George Osborne will on Wednesday deliver his sixth Budget and arguably his most important one -- because it will be his final offering to contractors and the public before voting in May, writes Tony Harris of specialist IFA Contractor Money.

The chancellor is renowned for keeping his cards close to his chest, and so predicting where he’ll raise, fold or call when there’s an election to be won isn’t easy.

But despite Mr Osborne saying at the weekend that there will be “no giveaway” and “no gimmicks” at Budget 2015, he’s too politically sharp to give contractors and other voters nothing. He’s also known to like a grand gesture or two, so much so that in the coming months we’ll see the results of the aces up his sleeve that he laid on the table when he was previously at the dispatch box. Pensions, savings and investments could of course be subject to further proposed changes tomorrow.

Osborne to ensure millions more pay less tax

The chancellor may be planning to give millions of people a pre-election boost by announcing a further increase in the personal allowance, despite it costing him a pretty penny (he must fork out £500m for every £100 increase). In Autumn Statement 2014, he announced it would increase to £10,600 from £10,000 on April 6th 2015, but it remains to be seen if he will announce further changes on Wednesday. Commentators expecting him to go further point out that because he’s raised the allowance so continuously, that he’ll simply stick to this tried and tested crowd-pleaser. On the flip-side through, his regular notching up of the personal allowance is a crowd-pleaser that he’s used so much that now, it may well have lost its electoral impact.

Either way, the new £10,600 allowance means that 24.4 million people are already set to pay less tax from next month, and 430,000 will be paying no income tax at all. Unlike in previous years, higher earning contractors can also benefit because this time the higher rate tax threshold will be moved to £42,385. The threshold for 45% income tax will remain at £150,000.

Meanwhile, couples paying the basic rate of tax should also see a change in their circumstances. If your income is less than £10,600, and your spouse earns between £10,601 and £42,385, you may be able to reduce your partner’s tax by up to £212 a year in 2015-2016. The recently introduced Marriage Allowance (MA) enables couples who are paying low or no tax to transfer up to £1,060 of their tax-free allowance to their husband, wife or civil partner. Employing your partner legally, could be a very effective way for contractors to benefit from tax breaks, although the MA’s eligibility criteria confines it to lower-earning contractors.   

A nation on the move

It has been touted that the UK needs a specific government body to promote UK home ownership and specifically to help first-time buyers get on the property ladder. Mr Osborne has been alerted by The Building Society Association (BSA) of the need for the housing minister to be appointed to cabinet.

And even beyond the BSA, there’s a strong feeling that there should be a specific body that looks at housing needs against the backdrop of a growing population. It should be able to engage with the property industry too, given that it is such a vital part of the economy.

It has been estimated that the government raised £15billion through the sale of NS&I over-65 pensioner bonds, which the BSA has suggested could be used to fund affordable housing developments. This could be a small step towards preventing inter-generational strife, as the current housing policy looks increasingly favourable to older voters at the expense of the young. Indeed, there’s talk this week that buy-to-let pensioners could inadvertently drive up property prices and freeze out first-time buyers trying to get into the market.

Regardless of whether or not these specifics make it in to Budget 2015’s full report on Wednesday, the property market and homeownership are likely to feature in the Budget speech as this is fast becoming among the bigger battles of the election, and one which Mr Osborne can’t afford to lose. He is likely to remind us of the coalition’s new first-time buyer scheme which aims to introduce 100,000 new starter homes by 2020. Watch out for him name-dropping the Prime Minister too, as David Cameron has vowed to double this new housing stock if the Conservatives win the election.

Chancellor to woo older voters

Compared with previous years, Budget 2014 was an exciting one with plenty to cheer about as a real revolution was announced in the pensions arena. As of April 2015, the over 55s will have increased pensions freedom, allowing them to draw any amount of capital/income they require from their pension pot on a year-to-year basis. This will be welcomed by contractors as their working circumstances can be far more changeable than a permie’s.

The changes will also mean pensions can be passed on to dependents and love ones, tax-free in some circumstances! Specifically, if the investor dies before the age of 75 the fund will remain tax-free. If a pension is passed on over the age of 75, the beneficiaries will not be liable for tax if the money remains invested. If it is withdrawn as a lump sum, then the beneficiary will pay income tax at their marginal rate, which is still an improvement on the previous 55% ‘death tax’ of old. At a stroke, pensions have become a central part of estate planning down through multiple generations.

In December 2014, pensions minister Steve Webb stated that millions of people would be disqualified from the new pension freedoms that come into force in April due to being locked within previously purchased annuities. In the run-up to the election, there has been serious discussion around allowing pensioners to sell these products in return for cash. This would mean five million savers/voters could escape their annuity by selling it to an insurance company or pension fund. Obviously there would be no obligation to do so but the choice would be there to gain upfront capital rather than continued income. At the weekend, the government turned this ‘hot’ talking point into an actual policy, giving the green light to sell annuities in return for lump sums.

Allowing millions to control how they access their future retirement funds is an extremely savvy election ploy, so we expect Mr Osborne to spend time on this point in Wednesday’s speech. He’s already made clear that he thinks it’s patronising to older people to suggest they would blow their pension pots. He’ll be hoping these people pay his party back at the polls.

Do even more on pensions please

An increase on Wednesday in the annual and lifetime allowances for pensions plans would be great for contractors, considering these have both decreased over the last three years. In 2013-14, the lifetime allowance was £1.5m but it reduced in 2014-15 to £1.25m. An increase would mean savers who have already grown a significant retirement fund could save even more and be eligible for a significant extra amount of tax relief.

Meanwhile, the introduction of auto-enrolment means millions of people will be automatically signed up to a workplace pension by their employer, as a way for the government to encourage people to start saving for the future. This means a contribution from the employee, employer and government tax relief. This could be a positive move to encourage people to save for their retirement early, however it hasn’t been made 100% clear how auto-enrolment will affect micro businesses and small  limited companies, such as contractor one-man bands. So on Budget day, we’ll be hoping that clearer guidelines on this initiative will be introduced, or at least committed to.

Getting down to business

The oil and gas industry has been dealt a huge blow in recent months, with oil prices falling dramatically. This is great news for consumers, but it’s not so great for the economy in extremely vulnerable parts of Scotland. Fortunately, the chancellor has stated he is committed to supporting the North Sea oil industry by introducing further tax cuts to offset the fall in global oil prices. Contractors serving the industry, who may be feeling the pinch professionally if they’re at BP, will welcome any intervention, as action needs to be taken now to ensure this fall in the oil price doesn’t starve the sector of investment and dangerously effect tax revenue and contracts in the long term.

At-a-glance: the seven steps Osborne should take

Given how close the polls are, Budget 2015 is likely to be more about  gaining votes than planning for the longer term future of the nation or government’s finances. Put another way, because of the political climate, Osborne’s final Budget may be short on actions and long on promises – at least as far as your pocket as a contractor is concerned. Nevertheless, here’s our pre-budget wishlist of what we’ve said we’d like from the chancellor:

• A serious commitment to solve the housing shortage
• No U-turn or caveats on  post-annuity pension freedom
• No adverse late amendments to the new pension flexibility rules
• An increase in annual/lifetime pension and ISA allowances
• Clear, definitive guidance on how contractors may be affected by auto-enrolment
• A boost for oil and gas contracting in the shape of North Sea tax breaks
• Any hike in the personal allowance to be passed on fully/to the higher rate tax band

We’ll be scrutinising whatever moves the chancellor does make on Wednesday, and will provide ContractorUK with a full analysis on what they mean for you and your personal finances as a contractor, in time for Thursday March 19^th.  

Editor’s Note: Related Reading –

Contractors’ 2015 financial calendar – Q1 & beyond

Budget 2015: Contractors’ Wishlist

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