ROSS LECKRIDGE looks at the possible options facing the Chancellor
We’re currently experiencing one of the longest run-ups to any Budget, with almost 100 days between the announcement at the end of July and the actual Budget on 30 October. This is partly due to the Labour Party’s pre-election commitment that future Budgets would be evaluated in advance by the Office of Budget Responsibility (OBR), in an attempt to avoid the market turmoil caused by some previous fiscal events.
The result of such a long wait is that there has been a huge amount of speculation about what changes might, or might not, be made. The government has explicitly ruled out some ways to fill the gap of £22bn (or more, depending on which figures you use). These include increasing VAT, income tax and employees’ National Insurance on working people.
What both the Prime Minister and the Chancellor have repeatedly said is that it will be those with ‘broad shoulders’ who will be ‘bearing the heavier burden’ – and that could include people with pensions, people paying capital gains tax, and people paying inheritance tax.
Tax, national insurance and pensions
The government’s refusal to rule out increasing employers’ NI contributions makes this a likely possibility. One option is that NI could become payable on pension contributions – if this were to be 13.8%, as with other expenses and benefits, the Resolution Foundation estimates it would raise up to £12bn by 2030, making at least a dent in the ‘black hole’.
But this could have a significant impact on employers’ view of pensions and research from the ABI suggests that 42% of companies currently paying contributions above the auto-enrolment minimum would lower them if NI was introduced. It would also remove the key attraction of salary sacrifice schemes to employers and would possibly cause a significant reduction in firms offering this type of benefit.
Considering tax and pensions, one option could be to introduce a flat rate of tax relief, or at least to cut the higher rate of relief. But this would hit public sector defined benefit schemes hard, as well as being very complicated and expensive to implement, making this, or any reduction to the tax-free cash element, potentially unacceptable politically.
A tax on inherited pension pots, currently outside the inheritance tax (IHT) regime if you die before the age of 75, is another option and one which could require people to make significant changes to their retirement and estate planning.
Capital Gains Tax
Firmly in the camp of ‘the government has refused to rule this out’ and also in line with its repeated statements about taxing those who are better off, is the potential to reform capital gains tax. There are various tweaks that could be made to align the rates more closely with other taxes, including changing the headline rate, or reducing or abolishing the annual exemption.
There has also been a suggestion of charging capital gains tax on inherited assets, with the IFS estimating that this might raise £1.6bn a year. Investments in tax wrappers and ISAs are currently safe from any changes (although separately the government has committed to simplifying the ISA landscape).
Inheritance Tax
IHT may prove an attractive source of funding, and the option of reducing the nil-rate band (currently frozen at £325,000 since 2009) could bring more estates under the IHT net. The £175,000 residence nil-rate band could be reduced, removed or simplified. There is also the potential to review the rules on gifting. With gifts between individuals currently exempt (if the person gifting survives for seven years) this option could be removed or replaced with a lifetime limit.
Time to catch our breath
It’s rarely a good idea to make any financial decisions in haste, especially when there are a lot of changing rumours ahead of this particular Budget. The good news is we’ll all know the facts by the end of this month and, in the meantime, you can always talk to a professional financial planner if you’d like to discuss what your options might be in different circumstances.
Ross Leckridge is a chartered financial planner at Aberdein Considine Wealth
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