Expect the Budget to target pension relief and tax credits to allow Tories to keep pledges on income tax and VAT, writes Jeff Salway
LOW-income workers will be hit hardest in this week’s emergency Budget as the government sets out the first all-Conservative package since 1997.
It will also contain a fresh overhaul of the taxation of pensions, including restrictions on pensions tax relief that could be used to fund a cut to inheritance tax (IHT).
The emergency Budget will unveil for the first time the steps the government intends to take in meeting its aim of reducing the welfare bill by £12 billion, in a move described by the Institute of Economic Affairs as likely to be “extremely unfair on the working-age population”.
Chancellor George Osborne’s room for manoeuvre is curtailed by a Conservative pledge to introduce legislation guaranteeing no increases to VAT, income tax or national insurance contributions within the next five years. There’s still plenty that can be tinkered with, however. Here are some of the measures we can anticipate in Wednesday’s post-election Budget.
Tax on pensions
The most widely expected move affecting pensions is a reduction in the amount of tax relief that high earners can claim on contributions. The relief is paid at the individual’s marginal rate, which means the highest earners can claim 45 per cent relief, but experts believe it will be restricted for those earning over £150,000. The Tory election manifesto proposed a sliding scale reduction to the annual allowance – which allows individuals to contribute up to £40,000 to their pension while claiming full tax relief – at £1 for every £2 earned over £150,000.
Gregor Munro, financial planner at Johnston Carmichael Wealth in Edinburgh, said: “The Tories promised they would review this measure in their manifesto and it’s highly likely that this will be near the top of their agenda as it’s a relatively painless way for them to claw back additional funds to address the deficit.”
Restrictions on pensions tax relief could be accompanied by the abolition of salary sacrifice, whereby individuals can arrange with their employer to reduce their salary in return for increased contributions to their pension.
The lifetime allowance (LTA) – the maximum that can be saved tax-free into a pension – was reduced from £1.5 million to £1.25m in April and will fall further to £1m next April, it was announced in the March Budget. Now it may well be scrapped altogether, a policy long favoured by new pensions minister, Ros Altmann.
“While this is an issue which impacts mainly on well-heeled investors, over the longer term the LTA has the potential to affect middle-income earners,” said Munro. “With Ms Altmann now at the helm, we may ultimately see the government do away with it all together.”
With almost half the welfare bill going on pensioner and child benefits that are protected from cuts, the government is targeting working and child tax credits as part of its plans to slash welfare spending.
Two thirds of the 4.5 million people claiming tax credits are in work and Scottish Labour has warned that almost half of all families in Scotland with children would be affected.
“A figure of £1,690 has been referred to as a potential loss of benefit for a family with two children, which would no doubt impact on many families,” said Munro. “Whilst some have been experiencing better pay awards in recent years, it would take a sizeable pay increase for many to offset such a reduction.”
Housing benefit is also in the Chancellor’s sights, with the possibility that it will be scrapped for 18 to 25-year-olds, while tax may be introduced on the personal independence payment (previously the disability living allowance).
The “nil rate band” has been frozen since 2009 at £325,000 (£650,000 for married couples and civil partners), above which IHT is charged at 40 per cent. The Chancellor will on Wednesday raise the individual residential property threshold to £500,000, providing a joint IHT allowance of £1m.
“The additional £175,000 rise per person to reach the magic £1m cap may only apply to a couple’s property rather than other assets,” said Munro. “This could have an impact on the wider property market if elderly people were incentivised to remain in large properties or even upgrade later in life to ensure their wealth can be passed on tax-free to their family.”
Capital gains tax
CGT was a notable exclusion from the list of taxes that the government has pledged not to raise for the next five years. Up to £11,100 of capital gains can be taken tax-free in the current tax year, with tax above that level charged at 18 and 28 per cent for lower and higher rate taxpayers respectively. CGT could now be realigned with income tax rates at 20, 40 and 45 per cent, possibly taking effect the day after the Budget, according to Jason Hemmings, partner at Cornerstone Asset Management.
“CGT may also be imposed on principal residences, and whilst this will be viewed as penal, I don’t believe this will happen for several years and will be structured to possibly only include properties of significant value,” he said.