Hopes raised for Budget tax cuts

PENSION investors are in George Osborne’s sights as he puts the final touches to a Budget in which tax giveaways are set to be in short supply.

The Chancellor is being urged not only to ease pressure on cash-strapped households – with an income tax allowance rise or by scrapping a planned hike in fuel duty – but also to boost confidence in the ailing economy. With unemployment soaring and consumer confidence at rock bottom, growth policies are in demand too.

“This might actually be a Budget worth listening to,” said John Cairns, partner and head of private client tax services at BDO in Scotland.

Paula Fraser, tax director at Grant Thornton in Edinburgh, said: “There may be targeted but small tax breaks for the most vulnerable sections of society, including families on low incomes and the elderly, but expect a focus on further anti-avoidance measures, including a clampdown on stamp duty land tax avoidance.”

Tax giveaways will be in short supply, warned 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.”

So what can we expect on Wednesday? Here are five options that could have implications for you.

Pensions tax relief cut

What? With calls for a crackdown on more affluent elements of society to balance the economic pain felt by those on lower incomes, there is a chance that higher and top-rate taxpayers may lose their right to pensions tax relief at 40 and 50 per cent.

Fiona McDonald, partner and head of tax at Pagan Osborne, said: “If the change is brought in, then those who received relief at 40 and 50 per cent will suffer an increase in their tax liability.”

Why? Restrictions on tax relief may give the Chancellor room for manoeuvre with other policies targeted at the top end of the income scale, such as the 50 per cent income tax rate. But with higher rate tax relief costing the Treasury an estimated £7 billion a year, the revenue is tempting too.

Will he? Less than evens but can’t be ruled out. Fears of undermining confidence in pensions months before workplace pension reforms come into force should ensure higher rate tax relief stays – for now at least.

Personal income tax allowances

What? A rise in the personal allowance to £10,000 – making the first £10,000 of income free of tax – was among the coalition government’s earliest pledges. It is already going up to £8,105 next month, but the Liberal Democrats want the increase to be accelerated.

The pledge that no-one will pay income tax until they earn £10,000 is the coalition’s central personal tax policy that is “unlikely to waver”, says Cairns at BDO. But while it would lift some low-income earners out of income tax, taxpayers at the opposite end of the income scale would be among the biggest beneficiaries.

Why? Politically the argument is that it helps some of those hit hardest by the downturn and government spending cuts. Lifting the income tax allowance from £7,500 to £10,000 would save an estimated £500 a year in tax for families bearing the brunt of the coalition’s austerity programme.

Will he? There’s a strong chance. The Lib Dems in the coalition are pushing hard for it and may well get their wish in return for compromises on some measures affecting high earners. However, Fraser is unconvinced. “George Osborne will reaffirm the coalition target of raising the personal allowance to £10,000 by April 2015,” she said. “Although there are suggestions of a more rapid rise, this is unlikely to feature as the cost of implementing it is so high.”

Higher-rate tax cut

What? Some senior Tories are keen to scrap the 50 per cent rate of income tax, introduced in April 2010 on earnings over £150,000. The increase is likely to raise more than £6.8bn in the 2011/12 year, according to Tax Research UK, although the Treasury believes that tax avoidance measures could slash that to as little as £2.7bn.

There is debate over the prospect of a mansion tax being introduced in exchange for dropping the 50 per cent rate, but it would not automatically apply in Scotland, as council tax is a devolved matter.

Why? The government is under pressure from its allies in the business world to scrap the 50 per cent rate and send out a positive signal to wealth creators. The Conservatives are ideologically opposed to the rate, but in the current climate realise that any moves overtly benefiting the wealthy would pose a serious political risk.

Will he? Probably not. With unemployment high, wages stagnant in the private sector and public sector workers subject to a pay freeze, Osborne is likely to resist the temptation to scrap the 50 per cent rate. More likely is a statement on its removal two or three years down the line.

VAT reduction

What? The government’s January 2011 VAT increase from 17.5 to 20 per cent is considered by many to have been ill-advised, knocking consumer confidence and high-street takings at a time when they needed a boost. Cairns said: “VAT is, after income tax and national insurance, the most substantial source of tax revenues for the Exchequer, and the lobbying for a reduction in the rate is not responsive to reducing the fiscal deficit without alternative, more draconian tax increases.”

Why? Some industry sectors want targeted VAT cuts, such as in hospitality and tourism, while Labour is calling for a temporary cut in the 20 per cent rate to lift the economy.

Will he? The 20 per cent rate will stay unchanged. It would represent a political U-turn and an acknowledgement that raising it last year was a mistake.

Fuel duty

What? As it stands, fuel duty will go up 3.02p a litre on 1 August – an increase deferred once already – but campaigners want the hike cancelled altogether.

Why? With petrol and diesel prices hitting record highs in recent weeks, the planned increase is coming under fire from motoring and haulage groups. There are also calls for it to be cut, with the Centre for Economics and Business Research claiming a reduction of 2.5p a litre could help create 180,000 new jobs.

Will he? In a Budget thin on giveaways, a further freezing of fuel duty is a very good bet, although a cut is unlikely. With the Chancellor having spent around £4bn helping motorists, those calling for the duty to be slashed are pushing their luck.