THE chances of George Osborne dishing out pre-election tax giveaways when he delivers the Autumn Statement this Wednesday are looking increasingly slim.
Increases in both inheritance tax (IHT) and the 40p income tax thresholds are tipped to feature, while the Chancellor is likely to continue the pension reforms launched in the March Budget by changing the rules around tax relief.
With the deficit rising and income tax revenues a long way short of forecasts, Osborne has limited room for manoeuvre and a backdrop that adds to the political risk in making any lavish tax promises.
What is set out will still have significance for many of us, however. Here are some of the changes we can expect:
More pensions tinkering
It’s something of a cliché to predict changes to pension tax relief, but this time could well be different as the government builds on pension reforms taking effect in April.
Those changes will allow savers to cash in their entire pension pot from the age of 55, including 25 per cent tax-free. The remainder will be taxed at the individual’s marginal rate, rather than the current 55 per cent charge.
Pension funds in drawdown will no longer be charged IHT at 55 per cent on death, a move announced in September and brought forward from this week’s statement.
That has put pressure on the government to water down the existing tax breaks available on contributions to pensions, however.
The most likely change is the introduction of a flat higher rate tax relief of 30 per cent. Higher and top rate taxpayers can currently claim tax relief on pension contributions at their marginal income tax level.
There may also be fresh restrictions on the annual and lifetime limits for pensions. The latter – the maximum that can be saved tax-free into a pension – was reduced from £1.5 million to £1.25m in April and could now be lowered to £1m.
Peter Young, tax partner at Johnston Carmichael, added: “There’s potential for a further restriction in the annual allowance which dropped from £50,000 to £40,000 in April 2014 and we might also see the unused annual allowance reduced from three years to two/one year, or even to completely end carry forward entitlement.”
Income tax thresholds
The number of people paying income tax at 40 per cent has risen by more than a million since the coalition took power, due to below-inflation increases in the level at which it kicks in.
With the general election on the horizon the higher rate tax threshold seems certain to rise to £50,000. The promise was part of David Cameron’s conference speech and immediately seized on by critics as an unfunded tax cut for the better off.
The question is whether it’s announced this week or in the Budget next spring.
Ronnie Ludwig, tax expert and partner with Saffery Champness, said: “In recent years each increase in the income tax personal allowance has been below the rate of inflation, creating ‘fiscal drag’. The Conservatives have said they plan to increase the threshold for the 40 per cent income tax rate to £50,000 which, if passed, would reverse the anomaly.”
Ludwig also predicts a further acceleration in the timetable for the increase in the personal tax allowance, already due to rise to £12,500 by 2020.
There are several possible Autumn Statement measures that could affect IHT planning, including a potential hike in the nil rate band (NRB) from the current £325,000 per person (£650,000 for a couple) to £500,000 (£1m for couples). The threshold has been frozen at £325,000 since 2009, but as house prices have rebounded and pulled more estates into the net, calls have grown for the band to be raised.
The Tories still want to meet their pre-2010 election pledge of an increase in the NRB to £1m, said Young. “With the unshackling of the ties between the coalition parties as we head towards the election, we may see either a proposed increase in the NRB or at least a pledge to increase it towards the magic £1m level.”
Another option on the table is an increase in the IHT annual exemption from £3,000 to £5,000 per person
Tessa Till, partner at Pagan Osborne in Edinburgh, believes there may be some amendments to taxes on IHT trusts too. Most likely is a flat rate of 6 per cent on certain property trusts and a split in the available NRB between trusts created by an individual over a certain time period.
“This means that once the settlement NRB has been used up, any future trust will be charged to the full rate. The likely impact is that trusts will end up paying more IHT and clients will be less likely to use them,” said Till.
With HM Revenue & Customs recently closing its consultation on more stringent civil penalties for offshore tax evasion it seems certain that some related measures will be mentioned on Wednesday, said Till.
“The disclosure regime for tax avoidance schemes is also likely to be extended to take into account IHT schemes.”
Young also expects more activity in this area.
“We are already likely to see changes in the way non-residents are taxed. For example, we could see the potential loss of personal allowances for non-residents and the prospect of non-residents being taxed on gains when they sell a UK residential property,” he said.
HMRC recently came under fire from the Public Accounts Committee for being “unacceptably” slow in acting against tax avoiders.
It noted that up to £10m remained uncollected from one particular tax avoidance scheme that is now unlikely to be recovered.