SLUGGISH economy leaves Osborne with little to give away, writes Jeff Salway
Tax giveaways will be thin on the ground when the Chancellor delivers his Budget speech next week, with Scottish tax experts warning that calls for cash-strapped households to be given a timely boost have fallen on deaf ears.
George Osborne is said to be giving serious consideration to restricting higher rate tax relief on pension contributions, with rumours also swirling over changes to the amount of money that savers can put tax-free into pensions each year.
There are hopes that child benefit cuts coming into force next year could be watered down, however, while motorists and first-time buyers could be among the beneficiaries of measures unveiled next Wednesday.
But with the Chancellor given little room for manoeuvre by a moribund economy and backed into a corner by the government’s fiscal consolidation programme, taxpayers can’t expect any major giveaways, said Neil Whyte, tax partner at PKF.
“We could well see a few headline- grabbing announcements, such as further increases in personal allowances, but expect these to be paid for by initiatives like a reduction in tax relief on pensions for 50 per cent taxpayers or an extension in the scope of capital gains tax,” he said.
Speculation lingers over a possible res–triction on the tax relief paid on pension contributions to 40 and 50 per cent rate taxpayers at their highest marginal rate.
Alison Fleming, head of pensions at PwC Scotland, said: “On the one hand, there is an argument that pensions have been tampered with many times in recent years and that further changes risk eroding trust in pensions.
“On the other hand, economic necessity means the government is exploring every means of clawing back revenue and tax relief on pensions costs the Treasury around £28 billion every year.”
Withdrawing or limiting the relief would be politically easier to implement than other measures, Whyte pointed out.
“With cuts to state benefits and public sector pensions under way, it may be hard for the Chancellor to justify continuing with tax relief worth up to £25,000 each year to 50 per cent taxpayers.”
Fresh cuts to the amount that can be saved to pensions each year have also been mooted. Fleming said: “This would be simpler to implement, but would impact more on middle income earners.”
Less likely is the rumoured removal of the 50 per cent top rate of income tax on earnings over £150,000, according to Fleming.
“It will stay for the short to medium term, but I would expect a statement on how long the government is going to keep it.” she said.
The revenue raised from that is expected to help pay for an acceleration in the rise in the point at which earnings are subject to income tax.
The government target is for the personal allowance to begin at £10,000 by 2015 and it is already set to increase to £8,105 next month.
Osborne could also extend the stamp duty holiday on first-time buyers. The 1 per cent stamp duty charged on properties worth between £125,000 and £250,000, lifted in March 2010, is set to be reintroduced on 24 March. With the housing market recovery struggling to get off the ground, calls are growing for the exemption to be extended.
And PwC’s Fleming believes there is a chance that Osborne will relent.