As the end of the tax year approaches, most contractors can breathe a sigh of relief. George Osbourne’s turnaround on pensions reform means no last-minute scrambling to make tax efficient contributions.
Maintaining the current system of tax relief on pensions is good news for those in the contracting sector, with the Chancellor emphasising his ambition to “help people keep more of the money they earn.”
In the most part, the contracting sector has narrowly avoided the chancellor’s gaze. Government pensions and other registered schemes costs an estimated £36bn in lost tax revenue, and we should expect an attempt to claw some of this back over the course of this parliament. Considering that higher rates of tax relief on pensions costs the Exchequer £7bn every year, it is surprising that high earners are not being targeted as a means of recouping some of the revenue in this budget.
The move to an ISA-style structure: LISA
Instead George Osbourne has announced the Lifetime ISA, which will offer a flexible alternative or supplement to a pension. The Lifetime ISA is particularly aimed at the self-employed and freelancers; for every £4 paid into the ISA, the Government will top-up £1.
The catch? LISA applies only to the under 40s and substantial exit fees will be placed on withdrawing cash.
Others changes: new rules for PSCs
There may well be negative tax implications after the chancellor somewhat quietly announced restrictions on the use of personal services companies:
“Public sector organisations will have a new duty to ensure that those working for them pay the correct tax, rather than giving a tax advantage to those who choose to contract their work through personal service companies.”
This loophole has meant you can be paid as a company, with corporation tax as 20%, as opposed to a person being taxed at 40%. Used by freelancers and the self-employed and seen as an efficient way of reallocating tax, restrictions on Personal Services Companies may affect the tax of thousands in the industry.
The budget will come as more of a relief than a rejoice for those in the contracting sector, including umbrella companies, the self-employed and freelancers. While implementing some restrictions, George Osbourne has still left plenty of scope to make tax efficient decisions over the coming financial year, which is a far brighter outlook than many in the sector predicted.