Jeff Salway: George Osborne to take a shot at pension pot
After the pasty tax shambles the Chancellor hopes hitting high earners will deflect from an inevitable raid on benefits, writes Jeff Salway
PENSION savers are in the Chancellor’s targets as he prepares for an Autumn Statement expected to hit low and middle income earners hardest despite claims to the contrary.
Tax crackdowns and yet another raid on benefits are on the cards ahead of Wednesday’s speech (effectively the coalition government’s version of Labour’s pre-Budget reports).
Motorists and cash savers are among those hoping for good news from George Osborne, but it’s likely to be thin on the ground as the foundering economy restricts the Chancellor’s room for manoeuvre.
Osborne will also be mindful of his Budget disaster earlier this year, which undermined the government’s claim to be competent managers of the economy. The measures set out in March were followed by a series of U-turns over issues including charity tax relief and the so-called “pasty tax”.
Paula Fraser, tax director at Grant Thornton Scotland, said: “Autumn is likely to be more about patent boxes and high-end property tax changes than pasties, after last March’s ‘omnishambles’, when a number of proposals were launched only to need a quick reversal as they proved to be unworkable.”
Lobbying has been intense in the weeks running up to the Autumn Statement and may yet influence Osborne’s hand. With that in mind, here’s what may lie in store.
The threat to the tax relief on high earner pension contributions has occupied the pre-statement headlines.
It is rumoured that the amount that can be saved annually into a pension and attract tax relief – reduced in 2010 from £255,000 to £50,000 a year – will be cut to £40,000 or even £30,000. Annual allowance changes of that scale would produce savings of up to £600 million and £1.8bn respectively.
Paul Renz, tax partner at Scott-Moncrieff, said: “This would make a good headline and it doesn’t affect many people. It may not reduce the long-term challenge of encouraging the majority people to save, as most people contribute less than this anyway.”
A more drastic option is to limit tax relief to the basic rate level of 20 per cent. The chances of the higher rate tax relief being scrapped altogether are very slim, however, not least because it would also require complicated restrictions on – or even outlawing – salary sacrifice.
Martin Campbell, director of tax services at Anderson Strathern, said: “This option would have a negative impact on a large number of taxpayers and would directly conflict with the government’s aim to encourage greater numbers to make regular pension contributions.”
Perhaps the most widely predicted announcement is a further deferral of a scheduled 3p increase in fuel duty. Originally planned for April 2011, then put back to January this year and again to August, a rise is due to take effect in January.
High motoring and energy costs mean the Chancellor is likely to put it back again, winning political points for helping hard-pressed households.
Tax avoidance is also in the Chancellor’s sights, with recent headlines over the cost of tax avoidance and evasion adding to the political and public pressure for new measures. The flagship measure will be the belated unveiling of the proposed general anti-abuse rule (GAAR), according to Fraser. “This will provide an underpinning piece of legislation to challenge more aggressive tax planning.”
Another pensions measure in the pipeline is some help for retirees who have seen the amount of income they can take from drawdown contracts fall sharply over the past two years.
Drawdown allows investors to leave their pension fund invested on retirement and take an income from it each year, instead of buying an annuity. But the maximum income that can be taken has plunged, due to lower gilt yields and the Treasury limiting the amount that can be take from the pension to 100 per cent of the equivalent annuity, down from 120 per cent.
Growing pressure from the industry and investors could see the Treasury ease those restrictions. Neil Whyte, tax partner at PKF, said: “Annuity rates have fallen to historic lows so by increasing the drawdown percentage to, say, 120 per cent as it was a few years ago, pensioners currently on low incomes would benefit.”
The focus on tax avoidance may extend to new tax reporting rules for offshore centres as the Isle of Man and the Cayman Islands.
“Compelling banks and other financial intermediaries to report to HMRC on the local accounts of UK resident individuals and companies would represent a step change in how the UK tackles evasion,” said Whyte.
There are also rumours that the government may accelerate the phasing in of the £10,000 personal tax allowance. “This would be highly attractive to the lower paid,” said Robert Hair, head of financial planning at Turcan Connell. “There has also been some speculation that in support of families initiatives may be brought forward to benefit married couples.”
The mansion tax proposed by the Lib Dems has figured prominently in the pre-Autumn statement horse trading at the Treasury, particularly as the top rate of income tax is due to fall from 50p to 45p in April. It won’t feature on Wednesday, however, with Osborne favouring pension tax perks as he bids to create the perception of a package that doesn’t let high earners off the hook.
Savers may also be left frustrated. Inflation and low interest rates have combined to hack away at cash savings incomes over the past four years, prompting calls for a more generous cash individual savings account (Isa) limit. Nationwide Building Society wants the cash Isa limit doubled to £11,280, putting it in line with the equity allowance, but the Treasury has offered precious little indication of any such plans.
Calls for a last-minute re-think of the child benefit tax charge coming into force in January will fall on deaf ears, while tax experts are talking up the chances of some tinkering with IHT loopholes, despite the government previously claiming it would leave IHT alone for the rest of this parliament. “It is not unheard of for cash-strapped chancellors to suddenly identify a long established planning technique as unacceptable avoidance and change the law to clamp down on it,” said Whyte.
“Removing certain unlimited IHT exemptions, such as the rules on gifts out of income or gifts that fall out of account after seven years, could raise future IHT revenues.”
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