Act fast to beat the emergency Budget

TAXPAYERS are bracing themselves for a day of reckoning, when Chancellor George Osborne stands up to deliver his emergency Budget in just over a week.

It seems we are being softened up for a major assault on our bank balances, given speeches from Prime Minister David Cameron and his Chancellor warning that the UK's debts are worse than they had anticipated, equivalent to 22,000 for each of us.

Yet tax experts predict the June statement may not be the ordeal by fire many are expecting from a tax perspective. Bigger shocks may relate not to tax rises but to spending cuts.

Indeed, Cameron said as much when he commented: "You have to address the massive welfare bills. You have to address public sector pay bills. You have to address the size of the bureaucracy that has built up over the past decade."

Nevertheless, a sword of Damocles is hovering over National Insurance, VAT and capital gains tax, as well as cars, employee benefits and pensions.

Leading Scottish accountants believe the Budget will not be one of precipitate action, causing immediate pain to the pocket, but a reprieve where a desire to make changes from April 2011 and beyond is announced.

PricewaterhouseCoopers' head of tax Valerie Smart says: "It is very hard to change most taxes in the middle of a tax year, because it involves complex systems. They are most likely to introduce changes for the next tax year.

"Above all I'm hoping for a bit of clarity. The Conservatives said they don't want to increase National Insurance, but we have no detail about what they will do. We know they want to review capital gains tax, but there is opposition to initial proposals."

Grant Thornton's Bruce Saunderson says there is no need to rush: "Yes the deficit has to be dealt with, but we don't have to solve the problem overnight. It's a bit like your mortgage. Yes it's a big debt, but no-one expects you to find the money in one go to pay it off.

"What people are looking to Osborne for is to deliver a well-ordered conservative budget with a small 'c' which shows he is grasping the nettle."

Chartered Institute of Taxation tax policy director John Whiting adds: "I think the Budget will be more about spending cuts and the direction of travel for tax rises than immediate hikes. The danger with immediate change is they do the wrong thing which may have to be unravelled at a later date."

Nevertheless, given the parlous state of the finances, some immediate increases cannot be ruled out. Here are some tips for beating the Budget.

Value Added Tax

VAT is the one tax which could be altered more easily halfway through the tax year. Raising it to 20 per cent from the current 17.5 per cent could bring in an extra 12 billion.

Whiting says: "VAT will go up at some stage. The question is from what date."

An alternative would be to widen the base and apply it to goods currently exempt such as food and children's clothes.

Finally, the government could introduce VAT at a lower tier, say 5p on some currently exempt items.

But Saunderson is not convinced it will rise in the Budget. He says: "It has only just increased from 15 to 17.5 per cent. The retailers would not welcome yet another change."

Smart adds: "VAT is certainly the elephant in the room. I still think on balance they won't act as early as the Budget."

Action: If you are planning any major purchases, get to the shops before the Budget. For major spending, such as a wedding or new kitchen, get the contracts drawn up and signed before the Chancellor stands up to speak.

Capital Gains Tax

The Government has signalled that it would like to bring CGT, currently charged at 18 per cent, into line with top rates of income tax. It has also indicated that the generous personal allowance of 10,100 could be cut significantly.

This could see investors losing a big chunk of their gains in tax. Worst hit would be property investors, unable to phase encashment of their holdings. After pressure, primarily from Conservative backbenchers, the Treasury is being forced to rethink its proposals.

Whiting predicts the Budget will announce further consultation which will lead to probably a 40 per cent rate, but with some indexation.

Saunderson believes any 40 per cent regime should be accompanied by much higher personal allowances, with concessions for the over-65s.

He points out: "Over a number of years, investors have lost faith with conventional pensions and have put money into property, where it seemed to be safer. It would be unfair to penalise them after saving prudently for their retirement."

However, Smart warns that returning to a system of indexation would not be welcomed by officials or tax advisers.

She says: "It is right that CGT should be brought closer to income tax, but not fair that gains which are primarily inflationary should be caught.

"But indexation is horrendously complicated, would need rebasing and is a huge amount of work for HMRC. Officials will be telling ministers that a flat rate is the best option, but on that basis 40 per cent is too high. Maybe 20 to 25 per cent would be fairer."

Action: Look at your investment portfolio, and if you were planning to take gains soon, then do so. However, Saunderson warns: "We have been reviewing our clients' positions with a view to triggering gains at 18 per cent. But there is just too much uncertainty, particularly if there is a prospect of exemptions for the over-65s. Where trusts are concerned, though, we are recommending liquidating some assets, as trusts are unlikely to be afforded the same latitude as individuals."

Cars

Motoring organisation the AA is bracing itself for some unpleasant shocks, saying we are now living in a "brave new scary world". However, it points out that motorists are already facing a 1.75p per litre increase in petrol prices, with a 1p hike planned for October and a further 0.75p in January.

It advises ministers when considering further rises to reflect that not only are drivers already under pressure, but fuel theft crimes are soaring.

Action: Think carefully about the kind of car you drive and how you use it. It might be worth changing to a smaller vehicle, or considering lift sharing or car clubs.

National Insurance

The Conservatives had indicated that they would like to avoid at least some of the NI increases proposed by Labour. However, there have been conflicting statements.

It seems probable that the employer element will be suspended, but the government may proceed with a 0.5 per cent hike in the employee rate, or press ahead with the full 1 per cent increase.

Action: increase payments into a pension to avoid NI

Inheritance tax

No significant changes are expected to the inheritance tax regime, and there is unlikely to be much spare for major giveaways any time soon.

Action: begin your IHT planning by considering giving away any assets you no longer require which could benefit from exempt transfer reliefs. After seven years they will fall outside your estate.

Income tax

The coalition is committed to increasing the personal allowance to 10,000, but this will be done in stages.

The expectation is that we will see a boost to personal allowances of between 700 and 1,000, up to 7,175 or 7,475, but not until next April.

Action: some pensioners or part-time employees who currently pay a small amount of tax may be removed from tax, so could register to receive interest gross. It may pay some employees further up the pay scale, due to receive cash bonuses much later in the tax year, to consider pushing that forward until after April to benefit from the higher allowance.

Pensions

The Budget is likely to discuss the state pension age with a view to making people wait longer. If you retired early and your company is paying you a certain level of pension, which will be cut when the state pension kicks in, you should contact them to see if they will pay the higher pension for a year longer, if it looks like you might be caught.

Others approaching retirement should consult their insurance companies or independent advisers about how their income will be affected.

The Lib Dems wanted to remove higher-rate tax relief on pension contributions made by the better off. This proposal is far from binned but seems to be off the table for the moment.

The industry is making an alternative suggestion of capping contributions at 50,000 annually. If at some stage you wanted to make such a big contribution, then start planning to bring this forward.

Finally, the government will almost certainly announce a review of the rule requiring you to buy an annuity at 75.

Action: Speak to your pension provider if you could be affected by a delayed state pension age. Otherwise, there is no need to make any precipitate pension contributions for fear of losing higher-rate relief. However, anyone who has left pension planning until the last moment in the hope of making some big contributions should watch developments closely. Those approaching 75 should speak to their financial adviser about their options should the annuity rule be abolished.