How plausible are the rumours about tax changes?
I’m 45, currently a higher-rate taxpayer and self-employed. How much truth is there in the rumours of a tax raid at the next Budget, particularly that the Government is planning to scrap higher-rate pension tax relief? Does it make sense for me to maximise my contributions this year?
Tom Selby, AJ Bell Senior Analyst says:
From a personal finance perspective, the two key policies that appear to be receiving some attention from Treasury officials (according to media reports) are pension tax relief and capital gains tax (CGT).
Pension tax relief is currently offered at your marginal rate of income tax. This means if you are a 40% taxpayer you are entitled to 40% relief, while a 20% taxpayer gets 20% relief.
The amount you can contribute each tax year is limited by the lower of your salary and £40,000. Those with no UK earnings can still contribute up to £3,600.
Speculation suggests the Treasury is considering scrapping this system and replacing it with a flat rate of relief, possibly set at 20% or 30%. While it is not clear how this could be made to work from a practical perspective – in particular, for defined benefit schemes – such a move would clearly affect higher and additional-rate retirement savers.
It’s worth remembering that ahead of most major fiscal events – and particularly during periods of profound economic uncertainty as the UK is experiencing now – there is always rumour and speculation about a variety of tax reforms.
For example, I have personally lost count of the number of times scrapping higher and additional-rate pension tax relief has been floated in national newspapers in the last decade, and to date it hasn’t happened.
While it’s worth making the most of the retirement saving incentives available each year, you should not be knocked off your financial plan by unfounded speculation.
Capital gains tax is broadly applied on chargeable gains made within a tax year above £12,300 (the ‘annual exempt amount’). There are also various gift allowances that fall outside the CGT net.
Where someone makes a gain above this amount, they will pay CGT at 10% on gains within the basic-rate tax band and 20% where it is in the higher or additional-rate band. For gains on residential property sales the rates are 18% and 28%, respectively.
The Treasury has instructed the Office of Tax Simplification to review CGT, with suggestions this could be a precursor to aligning CGT allowances with income tax allowances. If this happened it would have implications for anyone holding investments outside of tax wrappers like pensions and ISAs, which are CGT-free.
As with pension tax relief you shouldn’t change course drastically in response to this speculation. However, it might be worth using it as an opportunity to review any investments held outside tax wrappers and consider whether holding them in a pension or ISA could be beneficial.
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