George Osborne stands up tomorrow to deliver his latest Budget with twin targets of raising taxes and cost savings. So what can we expect this time?
It appears his main focus is on pensions.
Despite major changes already last year, many experts foresaw potential for structural change this time around. George Osborne has favoured either a move towards a Pensions-ISA removing all pension tax relief on entry, or a fixed-rate pension tax relief making tax savings from higher earners who currently enjoy tax relief on contributions at rates up to 45%. Both would bring the economic benefits of tax savings for the Treasury and both seen as electorate-friendly in the lower earnings levels, affecting those higher earners hardest as they would.
However, amid recent and growing concerns over the EU Referendum the desire for such widespread reforms has weakened Regardless, I believe the Chancellor will consult further so any reprieve will prove only temporary.
And we should still expect some changes in pensions.
Firstly, and most likely option, is a further reduction of the Lifetime Allowance, currently standing at £1.25 million and already to be reduced to £1 million from April 2016. A further drop to £750,000 is strongly favoured – it would provide tax savings and appeal to the public as it hits higher earners hardest.
Secondly, the Annual Allowance on making tax-relievable pension contributions would be a reasonable target. Currently capped at £40,000 pa and from April 2016 to be reduced by £1 in every £2 of taxable income over £150,000 down to £10,000 it would be no surprise to see a reduction to, say £25,000 maximum. Again, this cuts tax relief on higher earners whilst still encouraging lower earners to save more – part of this Government’s mantra.
He could also push through a restriction of the rates of pension tax relief, alone or combined with a reduced maximum. Such a measure would again benefit lower earners over their wealthier counterparts. A maximum tax relief at point of entry of 25% would prove popular, whilst more expensive for higher earners.
Hence, planning for your retirement will be even more important than it already is!
Capital Gains Tax (CGT)
Away from pensions the Chancellor might look at Capital Gains Tax.
Current CGT rates of 18% or 28% can be seen as generous; most attractive compared to their income tax equivalents. Increasing these rates, therefore, towards income tax levels, or to a fixed CGT rate of, say, 33% would satisfy both tests. Now even non-UK residents would be caught by this measure in regards to their residential properties under the non-resident CGT regime.
And the added bonus is an impact on tax planning, regarded by many as tax avoidance and immoral, though not unlawful. Succession planning and business exit strategies, for example, become more difficult and less attractive due to reducing tax differentials. Tax planning becomes more challenging but even more crucial than before.
Indeed, tax planning is an area where many want to see the Government take greater control. Perception from recent high-profile cases of larger multinationals, such as Google and Starbucks, is that these organisations need to pay ‘their fair share’. Certainly, expect greater emphasis and resources to be allocated here.
Income Tax allowance
On income tax, we might expect an increased Personal Allowance and perhaps upward changes to the higher rate tax band, reducing or removing more lower earners from tax liability. On the other hand, he can balance such generosity by reducing the current level of the Termination Payments Exemption, very generous at £30,000, or at least bring such payments within the charge to National Insurance Contributions.
Yes, the Budget is nearly here, and very interesting it will be…..