You win some, you lose some
Given the looming general election, pundits had predicted a low key budget today but there was still bad news for some clients. There were certainly positives too and here we interpret the impact of the budget on the UKs Freelancer community.
It was inevitably going to be a highly political budget given the proximity to the election but with some unexpectedly honest admissions regarding future tax hikes from Alastair Darling in recent weeks the devil was always going to be in the detail.
Darling ‘giveth’
There was good news for first time homebuyers in the announcement of an increase in the threshold before which stamp duty is payable. This will now be £250000 and should help build on the recent encouraging signs of optimism within the housing market.
It will ultimately benefit both first and next time buyers if this initiative helps to break the log-jam in the housing market by improving the number of transactions on that all important first rung of the ladder. The change may help avoid or at least soften the blow of the anticipated double dip in house prices this year.
As specialist mortgage advisers this announcement also comes on the back of our busiest month for our contract based mortgages since early 2008 as Freelancers shrugged off wider economic gloom to snap up bargains in a depressed market. Darling ‘taketh away’
Good news for first time buyers did not alter the fact that the Chancellor had previously announced a freeze of all income tax bands which, it was announced today, will help fund an unexpected, and many would say unaffordable, increase in public spending in the coming year.
A classic “stealth tax” tactic, this move will be far more aggressive than any previous Chancellor has attempted and will result in an extra 75,000 paying higher-rate tax for the first time, many of whom will be Contractors. The full impact on those Freelancers with incomes over £43,875 will amount to almost £500 extra tax and will make salary and dividend sacrifice into pension as well as profit retention within a limited company set up or gift aid all the more important for clients.
Inheritance tax thresholds will similarly be frozen but the Chancellor announced today that these will be held at current levels for 4 years, meaning that substantially more middle income households will now be hit by what was once a tax that only targeted the super rich.
The law of unintended consequences hits Contractors
As the mortgage broker of choice to UK Contractors we have helped many thousands of clients buy their own home and as such appreciate that within a relatively well paid community of professionals this increase in stamp duty threshold is very much a double edged sword.
Whilst well over half of all properties in the UK will now fall outside of the tax altogether but the majority of our clients will be purchasing above this new threshold and there will inevitably be an impact on sale prices above £250,000. Purchasers will be very keen indeed to drive vendors down below that all important £250,000 level because they will otherwise pay at least £7,500 in tax.
The same will happen to those few clients selling around the £1million mark where stamp duty has today been raised to 5%. Anyone breaching this limit will pay an additional £10,000 minimum in extra tax.
Company Tax
The news that the 22% corporation tax hike for companies with profits under £300,000 is still postponed is a welcome relief for Contractors operating through a one man ltd company and similarly the news that income splitting changes will remain on hold is a weight off many Contractors minds. This has been a huge concern for Contractors that share dividends with their partners but at such a politically sensitive time it would have been suicide for Darling to have announced changes that would have affected tens of thousands of family businesses.
Another positive announcement for one man limited company Contractors is that the ‘time to pay’ tax facility has been extended which gives small businesses the option to pay tax in afforadable instalments if they are struggling to meet a large bill.
Business rates will be cut this year for half a million small companies. This only partially makes up for the fact that bills were due to rise substantially this year for many however.
Encouragement for start-ups was enhanced by the doubling of Entrepreneurs CGT relief to £2million.
Scrumpy hit but Lara Croft gets state help!
The long anticipated tax hikes on alcohol, tobacco and fuel will hit almost every Contractor where it hurts but this was always to be expected when the Chancellor is looking to recoup such a vast deficit. Scrumpy has enjoyed a lower rate of excise than other alcohol but will stronger brands will now fall more into line with mainstream taxes. It may come back to haunt Darling when fewer people are going out and spending money due to their expensive travel costs and extortionate bar bills but for now it seems we will all have to accept that he was left with little choice.
Darling also confirmed the increase in national insurance for employees, employers and the self employed which will see contributions rise by 0.5% in April 2011 on top of the 0.5% rise he announced in the PBR in 2008. Again his will make salary sacrifice even more important for Contractors as you avoid national insurance and income tax deductions by contributing to a pension via your umbrella or one man ltd company.
A range of initiatives to boost key industries included support for the computer game industry and an enterprise funding bank aimed at helping innovative companies to expand.
The fact that the election is so near seems to have had a massive impact on the budget this year, with many of the predicted VAT rises and capital gains tax increases failing to materialise. However, it remains to be seen whether this will be announced in a post election budget by whichever party wins the vote. Many commentators believe that VAT rises are almost certainly needed to bring the public finances back in to shape and cut the massive public spending deficit.
Pensions tax relief unchanged
Fears that higher rate tax relief on pensions would be restricted proved unfounded and as covered elsewhere in this addition of Planet Contractor, will be one of the few remaining tax mitigation tools left to Freelancers in the coming year.
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