At this time of year our minds inevitably turn to the government’s budget, now set for October 29th, and any likely new measures that could impact your financial goals.
The chancellor of the exchequer, Phillip Hammond, has stressed that any major changes to fiscal policy will be announced in the budget rather than the spring statement, so we can be quite sure that the chancellor’s speech will contain measures that will impact your finances.
Indeed, the government needs to find an extra £20bn to cover the funding pledges that it has made to the NHS over the next five years. We think that will require raising tax revenues through a combination of tax hikes and axing (or reducing) various tax breaks.
Pensions tax relief, for example, costs the government almost £40bn a year. It is widely believed that this is high on the list of targets, along with other tax-efficient investments and thresholds. All of which means that almost all savers and investors are in the government’s sights for one reason or another.
So what do we think could change on October 29th?
There has been a lot of talk about abolishing higher-rate tax relief and replacing it with a flat rate of 30%. The idea is that this would incentivise lower-paid workers to save more in pensions, while cutting the overall cost of tax relief for the government.
While this is not impossible, it is widely thought to be too controversial, and also too complex to implement. We think it more likely that he will target either the annual pensions allowance, the tax-free lump sum, or both.
The pension annual allowance stood at £255,000 as recently as 2011 but has been steadily reduced to its current level of £40,000. The chancellor could cut the allowance again, to £30,000. This would raise £500m a year, gradually rising to £1bn, according to former pensions minister Steve Webb.
Another possibility is that the chancellor will abolish the 25% tax-free lump sum that can be withdrawn from your pension fund at age 55, but we think this is unlikely for two reasons. Firstly, it would remove all of the tax benefits on pension withdrawals and push more savers towards ISAs, which diminishes security of retirement savings. And secondly because it would devastate existing financial plans for millions of people; it is extremely common to factor that lump sum into retirement plans for things such as paying off a mortgage or providing for their children. In our view it is unlikely the chancellor will go this far.
A politically ‘easier’ target could be the rules for those who earn over £150,000 a year. Currently, this group of high earners lose £1 of annual allowance for every £2 of income over the £150,000 threshold. This applies until the allowance is reduced by a maximum of £30,000, effectively reducing their annual pension allowance to £10,000 a year.
The chancellor could lower the £150,000 threshold to start reducing the annual allowance for high earners at a lower level, say, £100,000, thereby increasing the numbers of taxpayers who will see their annual allowance scaled back.
Inheritance tax (IHT) is another area that the government may target. The government commissioned a review from the Office for Tax Simplification to scrutinise the processes involved in the IHT system, which suggests various IHT tax breaks are in the government’s sights.
In the firing line could be business relief, which allows entrepreneurs to pass down businesses with up to 100% IHT relief. Shares in unquoted companies benefit in the same way. The chancellor could remove business relief from this type of investment, or broaden his net to reduce reliefs on Enterprise Investment Schemes, which can currently benefit from business relief on death.
Taxing the self-employed
In May of this year, the government launched a consultation document into so-called ‘off-payroll working’ rules. If implemented it would mean that self-employed workers and contractors who provide services through a company structure would be taxed at source by their clients. This would force companies to deduct tax and national insurance from the gross pay of self-employed workers.
The government has already introduced the rules for the public sector, a move which it says is now raising £410m a year in extra tax. It would not be a surprise to see them consider the same for the private sector.
In summary, there will always be changes announced in the government’s budgets, but we have been helping our clients navigate a constantly shifting financial landscape for generations.
We stand ready to offer advice on whatever issues emerge in October, and encourage you to get in touch with your Brewin Dolphin relationship manager if you have any questions at all.
The value of investments can fall and you may get back less than you invested.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.