New Chancellor, Rishi Sunak will make his first Budget announcement next Wednesday, 11 March. Laura Suter, personal finance analyst at AJ Bell and Tom Selby, senior analyst at AJ Bell, outline what people should be looking out for in relation to their personal finances.
- Urgent measures to address the NHS pension tax taper problem
While much of the pre-Budget speculation has focused on the future of higher-rate relief, the Treasury is under pressure to deliver a solution to the pension tax taper problem.
The taper, which can see the annual allowance of high earners reduced from £40,000 to £10,000, has created capacity problems in the NHS, where senior doctors with generous defined benefit pensions have been turning down extra shifts for fear of being hit with huge tax bills as a result.
After a difficult winter for the NHS and with the coronavirus outbreak threatening to put even more strain on resources, the last thing the Government needs is a pension tax-fuelled staff shortage.
The simplest solution here would be to scrap the taper altogether, at a cost of around £1billion a year. Alternatively, the Chancellor could expand the ‘threshold’ and ‘adjusted’ income measures used to determine whether the taper takes hold.
At the moment, the taper kicks-in when someone has threshold income above £110,000 and adjusted income above £150,000. If both measures were increased by £40,000, for example, the impact of the taper would be much less severe – although the Exchequer would also receive less revenue.
- Tackling the net pay auto-enrolment issue
At the other end of the income spectrum, the Conservative manifesto pledged to explore solutions to the auto-enrolment net pay scandal.
This problem affects those earning £12,500 or less who contribute to a net pay scheme. Because the contribution is taken directly from pre-tax pay, only those paying tax receive the tax relief they are due.
Given that in 2016/17 around three-quarters of the 1.3 million people affected by this anomaly were women* – who in turn already tend to have smaller pension pots than men – there is significant pressure on policymakers to deliver a fix on 11 March.
- Higher-rate tax relief under threat?
For the past decade almost every major fiscal event has been preceded by damaging speculation that higher-rate pension tax relief is facing the axe. This year has been no exception, with the Treasury apparently the source of the latest round of scaremongering as it desperately searches for extra cash to fund its spending plans.
While recently-appointed Chancellor Rishi Sunak is undoubtedly walking a fast-fraying economic tightrope – in part because the Tory manifesto promised not only a raft of tax cuts but ruled out rises in the rates of income tax, National Insurance and VAT – scrapping higher-rate relief to raise immediate cash would be a colossal political gamble.
Not only would it hit millions of core Conservative voters directly in the pocket, it would also risk an all-out war with public sector workers who, through their generous defined benefit pensions, receive a significant proportion of the £35billion annual tax relief paid out by the Exchequer*.
Such a move would also further fuel the mounting pensions crisis among self-employed workers. Not only are these people already excluded from automatic enrolment, but many have little or no pension savings at all. Removing the ability to claim higher-rate relief would be another kick in the teeth.
In terms of the numbers, a 30-year-old higher-rate taxpayer paying £500 a month into a pension would be left £50,000 worse-off over the course of 35 years if higher-rate relief was abolished. If they invested their extra relief and enjoyed 5% annual investment growth that figure rockets to £140,000, after charges.
- Alternative revenue-raising options
With the Chancellor effectively boxed-in by his own fiscal rules and pledge not to raise taxes or NI, and potentially fearful of the political consequences of scrapping higher-rate relief altogether, he may look for other ways to raise cash.
Perhaps the simplest route would be to lower the annual allowance, currently set at £40,000, or the £1,055,000 lifetime allowance. However, given both have been slashed repeatedly since 2010 this would risk sending a seriously negative message to hard-working savers.
A higher risk option would be to limit the tax-free cash available, although this would be deeply unpopular.
Alternatively, the Chancellor may be tempted to attack National Insurance relief on employer contributions, which costs around £11billion a year*, or to remove the NI exemption on pension income. Both would come with significant political risks, however.
The generous tax treatment of pensions on death, which means savers can pass on unused funds tax-free if they die before age 75, could also come under the microscope. But again, the optics of introducing a pensions ‘death tax’ are unlikely to appeal to a recently-elected Prime Minister.
Pay and income
One of the big pledges in the Conservative manifesto was the plan to raise the threshold at which you pay National Insurance from the current £8,632 to £9,500 in 2020-21 – with the Government saying it gives everyone who earns more than £8,632 up to £100 a year extra in their pay packet. There were also blue sky aspirations to increase this threshold up to £12,500 in the future. Another key pledge from Boris Johnson was that he would not raise the rate of income tax, VAT or National Insurance – so any such hike would be viewed very dimly by voters.
Mr Johnson previously had ambitions to raise the higher-rate income tax threshold from £50,000 to £80,000. With a fresh Chancellor in situ he may have more leeway to do this, and remove an estimated 2.5m people from the higher-rate tax band**. However, this is a pricey giveaway and would have to come hand-in-hand with a tax hike elsewhere or a rise in borrowing.
For a fleeting moment it looked like the Government might try to raise money by putting an extra tax on those who have built up property wealth – either through higher council tax or an additional levy. The plans went down like a lead balloon with Tory backbenchers, who knew many of their constituents would be affected, and it seems the Government is backing away from this particular idea.
But we are expecting some changes to housing. Boris Johnson’s pledges during his campaign to become prime minister that he would slash stamp duty seem to have been forgotten, but they could resurface. What is more likely is plans to shake-up the mortgage market, revealed in the Tory manifesto, with a promise to offer more long-term mortgages in order to cut the amount of deposit first-time buyers need. Details on how this would work were scant, but we look forward to finding out more.
Both the Office for Tax Simplification and an All Party Parliamentary Group have called for this complicated tax to be reformed so that it’s much simpler for everyone to understand. One of the ideas the Government is rumoured to be considering is scrapping the extra reliefs offered to those who leave businesses or farmland, which make these assets free of inheritance tax. This would have a knock-on effect on investors, who can make part of their portfolios free of inheritance-tax by investing in certain small UK companies who benefit from the tax breaks.
The argument is that IHT is increasingly paid by the middle class, as those who are less wealthy don’t meet the threshold to pay it and very wealthy families can make use of tax breaks and pay for advisers to make the best use of those allowances. Other more radical ideas suggested include scrapping most gifts and allowances a cutting the current 40% tax rate down to 10% to 20% - but anything this radical is likely to be subject to a multi-year review rather than immediately being implemented.
Land value tax
Businesses have been calling for changes to business rates for years, and the Conservatives proposed an overhaul in their 2017 manifesto but that hasn’t materialised and businesses on the high-street are still shouting out for reform. The Tory manifesto pledged a cut to retail businesses and also a wider review of the system.
One suggestion floated in the build-up to the Budget is to replace business rates with a Land Value Tax, effectively shifting the tax burden to landlords. Rates would depend on what the land is used for, for example with a lower rate for farmland. The suggestion is that this could level the playing field between online and high-street businesses, as warehouses would be taxed alongside high-street stores.
The worry is that any announcement would be the launch of a review looking at ways to change the system, with businesses having to wait years for any actual change to happen. We’d also need to see exactly how the rates were calculated before we could tell whether it would actually save shops money.
Fuel duty has been frozen for the past decade and at some point a Government is going to have to bite the bullet and end the freeze. With such a focus on climate change and the impact on the environment at the moment, the Government could sell a hike in the rate as a ‘green’ move rather than just a tax grab. But the reality is that a 2p increase in the rate means taxpayers would pay around £4bn extra** and it’s a policy that affects people across many income levels and across the nation – meaning it’s unlikely to be popular with MPs.
This complicated tax policy has come to dominate the headlines, as more contractors fear being caught out by the tax office when the policy rolls out to private companies next month. The rules have been subject to a review and there were calls for the new Chancellor to use the Budget to delay the start of the rollout from the current April deadline.
However, the review has confirmed that the plans will go ahead and instead just offered more support for individuals and businesses and some leeway on fines in the first year. It would be remiss of the Chancellor not to touch on this massive hot potato in the Budget, but any meaningful changes look to be off the table.
**Source: Institute for Fiscal Studies
These articles are for information purposes only and are not a personal recommendation or advice.
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