What Summer Budget 2015 might mean for your money

George Osborne will take out his red box once again this year in about 48hrs’ time and deliver his first Budget for a majority Conservative government. Here, exclusively for ContractorUK, Tony Harris of IFA ContractorMoney predicts what it will contain for contractors and their personal finances.

Same chancellor, different story

Despite delivering six Budgets and Autumn Statements as chancellor under the coalition government, Mr Osborne had his hands tied by the need to have previous policies signed off by the ‘Quad’ i.e. himself, David Cameron, Nick Clegg and Danny Alexander. So this Wednesday is going to be the first time that Osborne can stand up in the House of Commons and deliver a purely Tory Budget, free of the constraints of having left-leaning partners, the Liberal Democrats. So what should contractors expect?

‘A long-term economic plan’

The biggest focus, of course, will be on the economy - the topic that arguably won the Conservatives their election majority. The party’s manifesto featured a five-point plan to “build a stronger, healthier economy and secure a better future for Britain,” and the chancellor will be keen to start delivering that plan. The five steps, containing some contractor-friendly pledges, were:

• Reduce the deficit to safeguard the economy and stabilise mortgage rates
• Cut income tax and fuel duty
• Create more jobs, backing enterprise with improved infrastructure and reduced taxes
• Cap welfare and control immigration
• Improve schools and opportunities for the next generation to succeed

We expect the above to provide a sort of blueprint of what to expect from this imminent ‘emergency’ Budget, as Osborne looks to set out his stall. It remains to be seen how this will unfold and there may be some surprises in store for the contractor community.

Pensions

The NHS was a contentious issue in the run-up to polling day in May, so it is likely that the chancellor will have plans to increase NHS budgets even further. However, given the pressure on the public purse, all of this spending has to be offset by cuts elsewhere and there are concerns that pensions tax relief for higher earners may be at risk.

Virtually every political party identified during the election campaign the enormous cost of tax breaks associated with saving for retirement, and they too identified this pot of gold as something to dip into to fund other announcements. There are perennial fears around adverse changes to the annual or more recently cut lifetime allowance, or even scrapping pensions tax relief altogether. Any of these three moves could have disastrous implications for the thousands of contractors using their pension as a central plank of their tax planning.

It would be a shock to some if Osborne did decide to go down this route as it would run contrary to previous measures that have seen the chancellor do so much to rekindle interest in pensions over the last two years. Pension flexibility announced in the 2014 Budget has enabled thousands of contractors to have complete control over their savings and access funds when they want to and on their terms. It would therefore be uncharacteristic of Osborne to take away one of the major perks of pension investment, particularly at a time when funding of the state pension is projected to come under serious pressure from changing demographics.

However, the smart money (at the time of writing) is on the chancellor announcing a cap on the amount of tax relief on pension contributions for those earning more than £150,000 a year. The one potential upside of this rumoured proposal is what the cap will be used to fund.

‘No inheritance tax under £1m’

Yes, where contractors on excess of £150,000 a year will lose out in pension tax relief terms, those with family homes worth up to £1million are expected on Wednesday to be told they will be entirely insulated from IHT – an extremely disliked area of taxation.

Although not applicable until 2017, this anticipated IHT waiver on such homes was signalled by Mr Osborne in the Times newspaper, in a joint article with Mr Cameron. The article does not state that Wednesday’s Budget will contain the proposal, but it seems highly likely that it will.

If the IHT threshold is indeed raised to £1m, it would of course offer welcome relief to, say, a contractor with large family home, assuming yet-to-be-announced criteria are met. But it will also please many a contractor who owns a modest terrace in almost any part of London, because their children will (from 2017) be able to inherit their property without any of the tax complications that would currently strip back the value of the contractor’s estate. The basic mentality of the PM and the chancellor is also likely to draw support from the contractor community. Their published article states: “It can only be right that when you've worked hard to own your own home, it will go to your family and not the taxman.”

Action on housing and investments

We also expect this week’s Budget to contain measures to boost house-building over the next five years, and one of these measures could be to encourage further institutional investment by pension funds and crowd-funding of ‘build to let.’ This type of investment isn’t unheard of among contractors looking for additional layer of income for when they retire, so some in the freelance community will no doubt welcome it if it comes about.

Less positively, an attack on the tax breaks associated with buy-to-let is increasingly being talked of in some circles, with the only reassurance tending to be that it would be difficult to introduce. A bit like the anticipated raid on pensions, we feel that hitting the buy-to-let sector would go so totally against the aspirations of the Tories’ core voters that it is unlikely to get off the ground. The government could however counter the negativity they’d receive in the bricks and mortar space by, in light of the mixed reaction on ‘right to buy’ for housing association properties, offer further help to young, first-time buyers . Enhancement of the Help to Buy ISA is therefore a prospect.

Freelancers may benefit from SME treats

Holding a summer Budget offers the chancellor an ideal opportunity to prove to the millions of Britons that voted ‘blue’ in May that the Conservatives’ election rhetoric was not simply ‘talk.’ With that in mind, we expect to see a raft of measures to encourage entrepreneurial Brits to take the necessary steps to set up new businesses. Much of the job creation in recent years has come from SMEs, and if the country can edge ever closer to full employment - so welfare falls and taxes rises - it will help balance the governments’ books. Measures to boost start-ups and one-man bands will be good news for enterprising contractors who could benefit specifically, especially if they want to launch a ‘Plan B.’

Another existing policy rooted in the coalition that could be developed on Wednesday for the good of smaller businesses is in the public sector. In particular, Budget 2015 version 2 could see further measures to help freelance consultancies receive government support on securing Whitehall and other government contracts, which would further pare back the dominance of large, incumbent providers. This would not only cut department spending but it would spread the income generated away from a handful of large ‘PLCs.’

No cease fire in the war on ‘avoiders’

There is also likely to be a continued focus on tax avoidance, including cutting down offshore tax schemes which may affect some freelance professionals. The chancellor will be under pressure to keep good on his election promises to stamp out “aggressive” tax planning, so the relatively small pool of contractors still using offshore schemes may be forced to rethink the structures they use.

Elsewhere in the government’s war on avoidance, we hope that mainstream umbrella companies emerge from this ‘emergency’ Budget unscathed, as they are sometimes unfairly tarred with the same brush as the offshore scheme providers. Having frightened some of the industry with the travel and subsistence plans announced earlier this year, it would be a tragedy if the authorities really hit umbrella and/or PSC contractors this time, perhaps by widening or just moving the ‘SDC’ goalposts.  

Benefits in the crosshairs too

The Tories made the rash election boast that they would cut £12billion from welfare. It’s a promise that possibly the party never expected to have to keep, given they were always able to adeptly blame the left-leaning part of the previous coalition for watering down their more right-wing proposals.

The ballooning cost of housing benefits (it has more than doubled since 1996) and ‘in-work’ benefits are therefore unlikely to escape the chancellor’s axe in this Budget. The blow of any substantial cut to top-up payments under the latter area could be softened by radically reducing the income tax take on low earners. Interestingly, contractors may be able to exploit such a move by benefitting from a substantially increased personal allowance.  Freelancers may similarly be better off from a higher threshold before 40% income tax is due.

Help for hard-workers

For ALL working Britons – aspiring, nine-to-five or independent, there should be some good news on Wednesday if they drive to interviews, a workplace or clients. That’s because the chancellor is unlikely to take a new road when it comes to petrol (even if his Budget is about as far from an election as you can get – and therefore the best time, politically, to deliver bad news). In fact, he has consistently cancelled planned fuel duty hikes in previous Budgets. And if he does play (again) to the  ‘hard-working’ crowd, which contractors are an important part of, he may improve the provision of free or subsidised child care -- an idea which was touted during the Tories election campaign, and which has the potential to release another pool of flexible working parents into the labour market.

Editor's Note: IFA Tony Harris's analysis of how contractors' personal finances are affected by the summer 2015 Budget will be published this Thursday morning on ContractorUK.