How contractors' cash fared at Autumn Statement 2015

Yesterday’s Autumn Statement 2015 could have been the most significant for contractors since IR35 was announced, and not for good reasons, writes Sat Singh, the chief executive of IFA Contractor Money.

Thankfully, it proved not to be that eventful from a tax or personal finance standpoint, although the chancellor did have a large whip to crack at property investors, and that could mean you - if you’re a contractor with a second pile of bricks and mortar.

Read all about it!

Before we explore the implications of AS 2015 for your cashflow as a contractor, here are some juicy personal finance headlines that George Osborne created yesterday:

• New tax to hit second homes
• Triple lock secured
• State pension hiked to almost £120 a week
• Single tier pension on its way from April
• ISA allowances protected
• Tax credit cuts torpedoed (sort of)
• Car insurance bills could fall by up to £50
• Lifeline thrown to London’s first-timers

Perhaps the most unwelcome of these for a contractor trying to put away and preserve some of their hard-earned cash in a profitable way was the first one – a new levy on buy-to-let properties. It was certainly the most unforeseen.

Buy-to-lets and second homes under fire; again

So in a bid to quell demand for buy-to-let properties and second homes, the chancellor announced further changes to the taxation of investment properties with a slab of stamp duty added to the purchasing cost.

He said in his speech: “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.”

This comes just a few months after Mr Osborne announced the phased withdrawal of mortgage interest relief on buy-to-lets from 2017. Such a withdrawal sees many contractors facing higher annual tax bills, as the new structure only allows a basic rate of tax to be offset against mortgage costs. 

The new change will hit contractors upfront, with a supplemental 3% stamp duty payable on the purchase of a buy-to-let or second from, take note; April next year. The changes will have a profound impact on would-be property investors, increasing the cost of buying a £250,000 buy-to-let, for example, by a not insignificant £7,500.

Contractors are likely to take advantage of the 5-month window of opportunity, and we expect the most established in this area to ‘load’ their portfolios ahead of the April deadline.

This second raid by the chancellor on the buy-to-let market may not be bad news for all though, as the levy will likely reduce demand in the South East and London, where property prices are highest, and thus the impact of the levy will be the greatest. The result? Some shrewd contractors will seek out properties further afield with the potential for higher yields.

The outcome will be less demand for property in the capital which will be welcomed by first- time buyers, especially in light of the chancellor’s latest Help to Buy offering – outlined below.

It’s a London (family home purchaser’s) thing

Tackling the shortage of housing in the UK has become a perennial debate with  Mr Osborne admitting yesterday that the government has not done enough thus far. He sought to put that right by announcing the biggest housing programme since the 1970s.

Alongside several affordable housing initiatives, the chancellor announced the introduction of Help to Buy London, intended to help buyers with a minimal deposit to purchase in the capital.

Much like the current Help to Buy scheme, buyers in London will need a 5% deposit but will benefit from a 40% interest free loan from the government, rather than the 20% offered under the existing scheme.

Contractors will welcome this new initiative, as many London-bound professionals who work on a temporary or freelance basis have found themselves priced out of the city market due to the rampant price growth its housing stock has experienced in recent years.

Credits and credibility

He wouldn’t like you to know it, but the chancellor was in bad need of a win yesterday after the tax credit cut shambles earlier this year. So his ‘rabbit out of the hat’ was a U-turn on his reforms that were due to bite tax credit recipients from April; this may succeed in turning down the political heat on him, but it will likely do little for his parliamentary credibility.

However, with no such climb down on Universal Credit, which is set to replace the system of tax credits from 2018, Mr Osborne may find himself back in the firing line before too long.

The contractor’s lot

Lastly, despite fears that AS 2105 would pull the plug on contracting as we know it, there was no mention of a ‘contracting cap’, and nor were there any significant changes to contractor taxation as a whole (other than those we knew about from his previous announcements).

Potentially worryingly though for contractors already facing the prospect of less attractive dividend rates, an additional £800m in funding is being handed to HMRC! Although the return is impressive - an estimated £5bn in additional taxes from tax evasion, this is an area that professional contractors don’t have any truck with. Nonetheless, the return on the Revenue’s radar of ‘disguised remuneration’ might unsettle some.

But as already mentioned, Mr Osborne’s ‘second homes’ tax is the main kicker of AS 2015. Our view, though, is that buy-to-let has always been a mainstay for contractors (traditionally as an alternative retirement strategy to pensions) and despite the price hike, contractors are unlikely to be dissuaded from this philosophy.

Undeterred, they’ll look beyond the cost of acquisition and focus on the long term benefits that buying property for rental purposes offers. That said, it’s likely that many contractors will seek to secure any further purchases ahead of April in a bid to save thousands of pounds in stamp duty. It really is a case of act now or pay later.