Advisers are trying to keep pace with what the impact of the Budget will be on their own businesses, as well as how the reforms affect clients.
In his first – and last – Spring Budget, Chancellor Philip Hammond announced two significant tax changes. One week later, only one has lived to see the light of day.
The first was a cut in the dividend allowance. This £5,000 allowance, which was introduced only last year, will be cut to £2,000 from April 2018.
More controversially, the Chancellor announced plans to increase National Insurance rates for the self-employed from 9 per cent to 10 per cent in April 2018, then to 11 per cent the following April. Following outcry from other MPs and the national press, this week Hammond pulled the measure, admitting it broke a Conservative manifesto pledge.
Hammond’s stated aim was to “level the playing field” between different types of employment. But the changes could also have affected many advice firms. So what are the implications of the remaining policies for adviser pay? And has the U-turn on NI been a blessing in disguise for advice firms?
The network effect
Perhaps the biggest impact of the increase to NI would have been for thousands of self-employed advisers, including those who work under the banner of larger networks. It is estimated that as many as 60 per cent of advisers may work on this basis.
Syndaxi Chartered Financial Planners managing director Robert Reid says: “Many advisers don’t choose to be self-employed; it is part of the terms and conditions of working for some of these networks.
“But if these advisers had been asked to pay higher NI rates, I wouldn’t have been surprised to see one or two challenging their status as ‘self-employed’ at a tribunal, in order to get better
benefits – be it sick pay or paid annual leave.”
HM Revenue & Customs has focused on this issue in recent years. Similar contracts have been challenged in other sectors, with the Court of Appeal recently ruling a self-employed plumber with Pimlico Plumbers should have been classed as a ‘worker’, and was therefore entitled to claim a range of employee benefits.
Reid says: “Are advisers really self-employed if their contract stipulates they can only work for that network, and business has to be signed off by the principal company?”
Many advisers don’t choose to be self-employed; it is part of the terms and conditions of working for some of these networks
Reid points out it is not just the cost of these benefits that networks or companies may have to find. If an adviser successfully argues they are ‘employed’, companies would also have to pay employers’ National Insurance at a rate of 13 per cent.
He adds: “This could have been a big problem for the industry, particularly as margins are tight.”
But not everyone agrees this could prompt widespread change in the sector.
But the Budget does signal larger tax bills for advisers who run their own businesses.
Plan Money director Peter Chadborn says: “Many advice firms will be set up like ours. There will be a couple of owners running this business as a limited company or partnership. Usually these owner-directors will pay themselves a fairly low salary but take dividends depending on the firm’s profits.”
But Page Russell director Tim Page does not think the reduced dividend allowance will lead to a change in the way advisers pay themselves.
He says: “The politics of this Budget might not have been that clever – in that the proposed increase to NI broke a manifesto promise. But the maths looks a lot smarter.”
For business owners who choose to take a mix of salary and dividends, the cost will depend on their tax bracket. Helm Godfrey chairman Danby Bloch calculates that basic-rate taxpayers will pay an additional £225 a year, higher-rate taxpayers will pay an extra £975 a year and additional-rate taxpayers will pay £1,143 in the tax year 2018/19.
Bloch says even with this reduced allowance, dividends look more tax-efficient than taking a bigger salary or bonus payment.
Threesixty managing director Phil Young says: “It’s important to look at these changes against the context of a reduction in corporation tax, the higher-rate tax threshold increasing, and a slightly higher capital gains tax threshold. For many people, taking a dividend will still probably be more attractive for tax.”
The politics of this Budget might not have been that clever but the maths looks a lot smarter
Aligned with clients
This desire to create a level playing field may go further than tax and NI rates. A review this summer into the ‘gig economy’ and self-employment may recommend further harmonisation in other ways – be it on the way expenses are treated or benefits in kind.
These issues are also likely to arise when advising clients. Chadborn says in many ways the interests of client and adviser are aligned.
He says: “We will be talking to accountants and looking at the potential impact these changes will have on our business, and we will be advising our clients to do exactly the same.”
Chadborn says advisers will have some clients where they deal with all aspects of their finances, and others where they may deal with only one area, such as pensions.
“This is an opportunity for advisers to add value by flagging up these issues to clients who are
potentially affected. This highlights the importance of working alongside other professionals, such as accountants.”
Young agrees: “Many clients will be self-employed business owners or semi-retired, so extracting income from these businesses is important. This is a good opportunity to add value.
“Accountants still often run this side of a relationship and I’m not convinced many advisers are that close to their client’s accountants; certainly few work in tandem with them. This might not be part of an adviser’s service proposition right now but it’s a great opportunity to extend into this area and possibly mop up a number of shareholders working within one firm.”
Of course, the dividend changes will also affect many investors. This will make Isas and pensions even more attractive, particularly with the Isa limit now rising to £20,000.
Page adds: “The reality is good financial planning involves taking boring but important steps each year. If people have significant investment portfolios, they should already be making the most of their pension and Isa allowances.”
The contradictions of the money purchase annual allowance
Many pension experts were hoping that Philip Hammond would abolish the proposed reduction to the money purchase annual allowance. He failed to do so.
This reduction – due to come into force this April – restricts the amount people can save into a pension once they have utilised pension freedoms. It will fall from £10,000 a year to £4,000 a year. Those that simply take tax-free cash – or money to pay for pension advice – are not hit affected.
But over half a million investors have already used pension freedoms to flexibly access their pension. All of them will be caught by this restriction for future pension savings, even if they did so when the MPAA was £10,000.
Towers Watson senior consultant David Robbins says it is unusual for pension rules to be applied retrospectively. He says: “Many of these savers may feel particularly hard done by. Some may not have taken this course of action if they knew this limit would fall to £4,000.”
There is the danger that someone accessing their pension in their 50s could breach these limits if they later rejoin the workforce and are automatically enrolled into a pension. Those that do will be hit with an unexpected tax charge.
Robbins points out most large companies pay around 9 per cent of an individual’s basic salary into a pension (this includes employer and employee contributions). At this level anyone earning more than £44,444 a year would breach these limits.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “More people will need temporary access to their pension savings, before resuming earning and saving.
“This proposal is symptomatic of a Government that has lost sight of the importance of putting individuals first. It is the worst kind of policymaking: it inconveniences and disproportionately penalises millions of ordinary investors and its barely going to save the Government any money.”