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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

We look at some of the possible changes relevant to investors

Philip Hammond will face some difficult choices when he delivers his first post-election Budget speech on 22 November.

The Chancellor will be keen to offer giveaways where possible, particularly to younger voters who gave the Conservatives a bloody nose at the general election. However, the economy isn’t exactly motoring at the moment and Hammond will be equally keen to demonstrate his commitment to spending discipline.

With that in mind, here are some of the ways the Chancellor could cut savings perks – and a few vote-winning giveaways for savers.

POSSIBLE CUTS

Pensions – higher rate
tax relief

As sure as night follows day, so rumours of cuts to pension tax relief precede the Budget.

Pension tax relief is currently granted at your marginal rate, so a basic-rate taxpayer gets 20% relief, a higher-rate taxpayer 40% and an additional rate taxpayer 45%.

However, some fear a Government desperate to raise cash could ditch this system and replace it with one where everyone gets 20% relief, regardless of income.

If this happened it would have a significant impact on the saving potential of millions of people. A 30 year-old higher rate tax payer saving £500 a month would lose out on around £115,000 by the time they are 65 if pension tax relief was restricted to the basic rate.

Pensions – annual allowance

It seems more likely the Chancellor will go after the annual allowance (set at £40,000 a year) or the lifetime allowance (currently £1m).

The annual allowance is ‘tapered’ down for anyone with total relevant earnings above £150,000, reaching a floor of £10,000 for those with total earnings of £210,000 or more.

The lifetime allowance is due to increase in line with inflation in April 2018 to £1,030,000 so it feels unlikely this will be cut, although by no means impossible.

The annual allowance would be the simplest tax relief lever to pull, and cutting this from £40,000 to £30,000 or even £20,000 – in line with the ISA allowance – would only hit the wealthiest savers.

While nobody knows for sure what will happen at the Budget, recent history suggests a cut in pension savings incentives is fairly likely. So if you are planning to make a big contribution this tax year, it may be worth doing it before 22 November.

The personal allowance

The personal tax-free earnings allowance has almost doubled from £6,035 in 2008/09 to £11,500 in 2017/18. Under current plans this will rise to £12,500 by 2020/21. The last rise in the personal allowance (from £11,000 to £11,500) cost the Exchequer around £2bn a year, so a further £1,000 increase would cost the Chancellor billions at a time when he can least afford it.

Given the price tag on hiking the personal allowance there may be a temptation to delay the increase to £12,500 or even halt it altogether.

POTENTIAL GIVEAWAYS

ISA allowances

British savers will be keeping an eye out for any increases to ISA contribution limits. However, given the main annual ISA contribution amount was increased significantly to £20,000 just 18 months ago, any increase here may be wishful thinking.

If the Chancellor wants to specifically target younger voters, an increase to the annual Lifetime ISA allowance may be more realistic.

The Lifetime ISA only launched in April this year and there are still very few providers offering it.

At the moment savers aged 18 to 39 can pay in up to £4,000 a year and receive a 25% Government bonus. You can keep paying in until age 50, and access the money tax-free from age 60, or earlier without penalty for the purchase of a first home or if you become terminally ill.

An increase in the amount people can contribute each year to £5,000, for example, would be a boost to younger savers and may encourage more providers to enter the market.

Increasing the pension contribution limit for non-earners

Another simple change the Chancellor could look at announcing is an increase to the amount non-earners can pay into a pension. This limit is currently set at £3,600 and has been in place for well over 10 years, so is overdue a boost.

Given the Money Purchase Annual Allowance – which applies to anyone who has accessed taxable income from their pension from age 55 – is now set at £4,000 it would make sense to bring the non-contributory limit up to this level and in the process at least marginally reduce the complexity of the UK’s pension tax framework.

Stamp duty holiday

The Chancellor will be very keen to include something that can help people get their foot on the housing ladder.

Stamp duty is a significant barrier for many people and so a stamp duty holiday for first time buyers, combined with a potential increase in the Lifetime ISA allowance, could go some way to solving the home ownership equation for younger people.

Tom Selby, senior analyst,
AJ Bell

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