Tax takeaways from the Budget

But in his Budget Statement, he insisted, “we want working people to keep more of the money they earn”, adding “my idea of ending austerity does not involve increasing people’s tax bills”.

Nevertheless, ‘Fiscal Phil’, as he referred to himself in the Budget Statement, set out his plans for the self-employed to pay more in taxes from 2020.

In the Budget ‘Red Book’, it states: “To help people comply with the existing rules and bring private sector organisations in line with public-sector bodies and agencies, the government will reform the off-payroll working rules (known as IR35) in the private sector. 

As pension contributions don’t fall foul of the ‘IR35 rules’ they remain a very effective way of extracting profits from personal service companies.Traceyann Kneen

“This follows consultation and the rollout of reform in the public sector. Responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.” 

The government has said these changes will not be introduced until April 2020 “to give people and businesses time to prepare”.

Hammond's attack

But Tim Stovold, head of tax at Kingston Smith, called it an “attack on contractors”.

“The off-payroll working rules for the private sector are now coming from April 2020 which is sooner than had been hoped but with only medium and large businesses having to comply,” Mr Stovold points out. 

“Although this is a relief to smaller businesses, it risks creating chaos for contractors who will still need to consider the existing IR35 rules when working for small businesses and will have to work with the new off-payroll rules when being engaged by larger businesses. 

“A single regime for all businesses with an implementation timetable that allowed all businesses to adjust their practices would have been preferred to the complexity businesses and contractors now face.”

Traceyann Kneen, head of technical at Nucelus, says it’s no surprise that the Budget included further changes to IR35 off payroll working. 

She explains: “IR35 legislation was designed to combat tax avoidance by workers supplying services to clients through a company. These workers would usually have been classed as an employee if the company weren’t used.

“These changes will mean large and medium-sized businesses using personal service companies take responsibility to make sure that those contractors not on payroll adhere to IR35 in line with arrangements in the public sector which were reformed in April 2017.”

She points out: “As pension contributions don’t fall foul of the ‘IR35 rules’ they remain a very effective way of extracting profits from personal service companies. 

“Advisers should remain alert as to planning opportunities.”

Tax take

Other headline tax announcements included the rise in the tax-free personal allowance to £12,500, which comes a year earlier than planned. 

The personal allowance, which is the amount earned before individuals have to start paying income tax, will increase by a further £650 in April 2019 to £12,500, the Chancellor confirmed.

He has promised to maintain this increase in 2020 which, according to the Budget documents, means a basic rate taxpayer will pay £1,205 less tax in 2019 to 2020 than they did in 2010 to 2011.

Mr Hammond also announced the higher rate threshold will increase from £46,350 to £50,000 in April 2019 – again, a year earlier than expected. 

The government states: “The amount people will have to earn before they pay tax at 40 per cent will increase from £46,350 to £50,000 in April 2019.”

According to the government, this means that in 2019 to 2020, there will be nearly one million fewer higher rate taxpayers than in 2015 to 2016.

Steven Cameron, pensions director at Aegon, says: “This is good news for those earning above the current upper limit. An individual earning £50,000 or above will save £60.83 per month in income tax. 

“However, what wasn’t highlighted in the Budget was that the upper limit for paying National Insurance at 12 per cent also goes up to £50,000.”

It is important to speak to your financial adviser to ensure you have all the necessary details before making any key financial decisions for the new tax year.Gary Smith

He adds: “As NI reduces to 2 per cent above the limit, individuals will pay an extra 10 per cent NI, meaning someone earning £50,000 will lose £30.41 per month in extra NI payments. The net effect is the income tax saving is halved by the changes to NI.”

This increase to NI was certainly not flagged by Mr Hammond during his 72-minute Budget speech but it does have an impact.

According to calculations carried out by Tilney, the “significant increase in the National Insurance band effectively negates 39 per cent of the income tax giveaway”.

So higher earners have less to get excited about than was initially thought.

Gary Smith, chartered financial planner at Tilney, explains: “The main headlines following the Budget were obviously focused on income tax and how much better off higher earners would be in the next tax year. 

“However, the subsequent increases to NI that have been announced will soak up a lot of the headline tax benefit.”

He warns: “While it still stands that most will be better off following the changes to income tax, the public should be aware that the bonuses will not be as big as promised when all the other changes have been taken into account. 

“It is important to speak to your financial adviser to ensure you have all the necessary details before making any key financial decisions for the new tax year.”

Quiet Budget

Fiscal Phil also delivered an increase in the lifetime allowance for pensions, which will be in line with CPI for 2019 to 2020.

For many, this was a surprise, as a cut to pension tax relief was the announcement many had expected the Chancellor to make.

Adrian Lowcock, head of personal investing at Willis Owen, acknowledges: “Pension tax relief remains in tact, which is good news for pension savers. 

“With the additional funding required to fulfil the Prime Minister’s pledge to increase the NHS budget by £20.5bn a year in real terms by 2023 to 2024, there had been fears that the Chancellor may go after pension tax reliefs which, as he told the IMF conference in Bali earlier this year, he considers to be ‘eye wateringly expensive’ – mercifully, this was avoided.” 

He notes: “The Lifetime Allowance (the total amount you can build up in pension benefits over your lifetime while still enjoying the full tax benefits) will increase in line with inflation from £1,030,000 to £1,055,000, which is good news for pension savers.”

Otherwise, it was what Rachel Vahey, product technical manager at Nucleus, calls “a quiet Budget for pensions”.

The increase in the annual investment allowance to £1m from January 2019, up from £200,000, for two years is being seen by many as a way to boost investment at a time when ongoing uncertainty around the terms of the UK’s departure from the EU is affecting investment decisions.

Mike Cooper, partner, owner managed business group at Moore Stephens, explains: “This is a significant and welcome increase in the Annual Investment Allowance, despite the measure only lasting for a short amount of time.

“It seems that the short-time frame is to encourage businesses to keep investing ahead of Brexit.”

“There are already signs that Brexit has led to businesses putting off their investment decisions. If businesses stop investing it will drag down economic growth.”

For a snapshot of the tax changes, click here.

eleanor.duncan@ft.com