YET more tax tweaks are on the way this week when the Chancellor delivers what is effectively his third Budget in just eight months.
The Autumn Statement on Wednesday could contain a number of reforms, even though George Osborne has already presented the March Budget and an emergency Budget in the wake of the general election.
Some of the biggest announcements in recent times have been around pensions, most notably the so-called “freedoms” that took effect in April. But pensions tax relief, the state pension and public sector pensions could all make an appearance in the latest raft of proposals and revisions.
Tax credits will feature too, while we could also get details of new rules around inheritance tax (IHT), Isas and national insurance.
Malcolm McLean, senior consultant at Barnett Waddingham, said: “We can probably look forward to an Autumn Statement more akin to a mini-Budget, with at least a few further surprises in store in those respects.”
Here’s a glance at some of the areas likely to be covered by the Autumn Statement.
The lifetime allowance (LTA) is being cut to £1 million in April, but there’s speculation that the Chancellor is considering additional LTA reductions for public sector pensions.
Gregor Munro, financial planner at Johnston Carmichael Wealth, said: “The impact would be felt across the higher level of the public sector. A senior civil servant, for example, with accrued benefits greater than a £50,000 yearly pension, could find themselves in a 55 per cent tax trap should they receive any income over this amount.”
Public sector workers could also see tax relief limited on future contributions.
“While this would save the Treasury money, any reduction would, of course, have a significant impact on tens of thousands of workers’ pension pots,” said Munro.
A consultation on a radical overhaul of the pensions tax system closed to responses last month, so any wide-ranging tax relief changes will be saved for next year’s Budget.
Changes to salary sacrifice, where an employee asks their employer to divert money from their pay into their pension, are another possibility, according to Munro.
“In July the Exchequer announced it would ‘actively monitor’ the growth in salary sacrifice schemes and their impact on tax receipts,” said Munro. “We might well see some changes to this measure.”
The Chancellor may also respond to pressure to slow down the increase in the women’s state pension age. McLean predicts that the rise from 65 to 66 will be extended by six months from November 2020 to April 2021.
The Chancellor has taken his proposed tax credit cuts back to the drawing board after the Lords voted to delay them until the government found a way of compensating low earners.
Elaine McInroy, tax expert at accountants Saffery Champness, said: “We still expect to see cuts of some sort to tax credits, but the Chancellor may have significantly less flexibility in this Autumn Statement than the original plan of over £4 billion worth of cuts would have allowed him.”
The most likely option is for the changes to be phased in more slowly or for the lowest earners to be protected from them, said Gwyneth Scholefield, human resources services director at PwC in Scotland.
“However, there are other routes open to the Chancellor to soften the impact. For example, he may announce that new minimum pay levels are increased or make tweaks to income tax or national insurance or both,” said Scholefield.
“The tax-free personal allowance could also be raised at an even faster rate, although this will have no impact on the lowest earners, such as apprentices and part-time workers who earn below the threshold.”
Wiggle room is limited here due to the so-called triple lock on the headline income tax, national insurance and VAT rates, which accounted for nearly three-quarters of tax receipts in 2014-15.
But national insurance thresholds can be altered and McLean believes Osborne will announce that from 2017 all people in work up to age 70 will be required to pay national insurance contributions (NICs) in the same way as anyone else of working age. Class 1 and Class 2 NICs currently end when someone reaches state pension age, even if they continue working.
“It is frequently said that there is no equitable reason why national insurance contributions on earned income should cease at the point where an individual earner reaches state pension age and chooses to stay on or resume work,” said McLean.
A reversal of the planned increase in the IHT threshold to £1m by 2020 is one way the Chancellor could offset the reduced savings from tax credits. Political expediency means this is a long shot, but there may be some tinkering at the edges, according to Tina Riches at Smith & Williamson.
“There are growing rumours that we could see a drop in inheritance tax relief on business and agricultural property,” she said. “However, if such cuts were applied it would be essential to retain the tax relief to reward long-term ownership of inherited business and agricultural assets.”
Osborne may also simplify the rules on the proposed IHT increase, which stands to benefit only families leaving a home to their beneficiaries. The standard IHT threshold could instead be raised to £500,000 for any individual.
“This would also stop the perverse incentive for couples to upsize properties so as to maximise IHT relief when they die,” said Riches.