In this special report, we look ahead to the Budget, what the government might change and why recent developments are likely affect the chancellor’s plans.
Much of today’s financial statement is expected to be devoted to the emergency measures designed to cushion the economic impact of the coronavirus. That doesn’t mean all Tory manifesto commitments will be postponed. While the government may drop its borrowing pledge and delay some of the bigger Budget decisions until later this year, Rishi Sunak is expected to announce a significant increase in spending, while pushing ahead with some personal tax reforms.
With that in mind, here are five potential changes to look out for.
Subject to certain limits, you get an automatic top up of 20% from the government when you pay into a pension. This means that if you pay a contribution of £80, a total of £100 is paid into your pension pot. If you’re a higher rate taxpayer, you can claim a further 20% tax relief through your annual tax return. (Note that in Scotland, Income Tax is banded differently, so pension tax relief is applied in a slightly different way).
This government giveaway is hugely expensive. The loss of Income Tax and employer’s national insurance as a result of the various reliefs adds up to £40 billion a year.1
The government caps some of the cost by limiting the maximum amount you can pay into a pension and still receive tax relief – called the annual allowance. For most people, this limit is £40,000 (or 100% of earnings if lower), but some top earners are subject to the ‘tapered annual allowance’ which can result in a maximum annual allowance of £10,000.
It now looks likely that any substantial changes to pensions tax relief will be signalled for later in the parliament. However, one area that may get a mention is the tapered annual allowance.
Under the taper rules, anyone earning more than £110,000 is at risk of having their annual tax-free pension saving allowance reduced from £40,000 to £10,000 a year. Anything over the saving allowance is subject to a tax charge.
The tapered annual allowance has proved toxic in its complexity for high earners, arguably creating many more problems than it solves, most evidently for the NHS. Faced with the prospect of paying extra pension tax charges, thousands of doctors have reduced their work commitments, leaving patients with fewer medics and longer waits for treatment.
Given that the NHS is likely to come under greater strain from the coronavirus outbreak, Rishi Sunak is expected to raise the point at which the taper starts from £110,000 to £150,000.
Focus “on ensuring the continued delivery of public services and measures to minimise the long-term economic damage from what will hopefully be a short-term increase in levels of illness.”
— IFS (@TheIFS) March 9, 2020
Income Tax is the single largest source of government revenue in the UK.2
The personal allowance – the amount that you are allowed to earn before you start paying Income Tax is currently £12,500. The higher rate threshold – the point at which you will start to pay 40% Income Tax – is £50,000. There is an additional rate tax band which kicks in at £150,000. (Note that different rates apply in Scotland – see table below).
Income Tax – England, Wales and Northern Ireland
|Tax band||Income threshold||Tax rate|
|Personal allowance||Up to £12,500||0%|
|Basic rate||Over £12,500 to £50,000||20%|
|Higher rate||Over £50,000 to £150,000||40%|
|Additional rate||Over £150,000||45%|
Income Tax – Scotland
|Tax band||Income threshold||2020/21 (proposed)||Tax rate|
|Personal allowance||Up to £12,500||Up to £12,500||0%|
|Starter rate||Over £12,500 to £14,549||Over £12,500 to £14,585||19%|
|Basic rate||Over £14,549 to £24,944||Over £14,585 to £25,158||20%|
|Intermediate rate||Over £24,944 to £43,430||Over £25,158 to £43,430||21%|
|Higher rate||Over £43,430 to £150,000||Over £43,430 to £150,000||41%|
|Top rate||Above £150,000||Above £150,000||46%|
The Conservative election manifesto promised not to raise rates of Income Tax, national insurance or VAT. That pledge ties the hands of the chancellor, who may instead be forced to look at freezing the personal allowance. And if the starting point for Income Tax were being frozen, it would be reasonable to also freeze the higher-rate tax threshold. Doing this could help to boost Treasury coffers, but it would bring more employees into higher rate tax brackets.
National Insurance (NI) dates back to 1911 and helps build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance. You begin paying NI once you earn more than £8,632 a year.
The rate you pay depends on how much you earn.
- 12% of your earnings between £8,632 and £50,000.
- 2% on any earnings above £50,000.
- You do not have to pay NI when you reach State Pension age.
Employers also have to pay NI at a rate of 13.8% of earnings above the £8,362 level. There is no upper limit on what employers have to pay.
Under current Conservative party plans, the earnings threshold for paying NI contributions is set to rise to £9,500 in this upcoming Budget. From there, they have pledged to increase it until it is eventually £12,500.
It’s estimated that 31 million people stand to benefit from a tax cut if the NI contribution threshold rises to £9,500 per year.3
If your net estate is worth more than the standard nil-rate band of £325,000, 40p tax is charged for every pound that exceeds the threshold. Broadly, if you leave your main residence to a lineal descendant, £150,000 is added to that total (rising to £175,000 from 6 April 2020). Unused elements of both allowances are transferrable on death to a surviving spouse or civil partner.
The current regime has been criticised for being both complex and discriminatory against those who do not own their own home, those who do not have children, and those who are not married or in a civil partnership.
There had been considerable expectation that the Inheritance Tax (IHT) rules would be rewritten in the Budget.
- The Office of Tax Simplification produced a report on the simplification of IHT in which it proposed that the current range of smaller gifting exemptions should be bundled together as one exemption of about £25,000 per annum.
- More recently, a cross party committee of MPs has suggested the government make more radical changes to IHT. One of these would be to remove the normal expenditure out of income exemption.
- Further options include reforming the treatment of transfers in the seven years before death, taxing all lifetime gifts, and revisiting the complicated main residence relief.
It now seems more likely that there will be a consultation on IHT announced in the Budget, but the government may wish to implement some of the suggested reforms more imminently.
“Governments at the beginning of a parliamentary cycle historically introduce the tax raising measures so that they have flexibility for ‘give away budgets’ later.”
Edward Grant, Director, St. James’s Place
Capital Gains Tax (including Entrepreneurs’ Relief)
If you sell any investments that were not held in a pension fund or an ISA, you could be liable for Capital Gains Tax (CGT) on your profits. The same goes for sales of buy-to-let property, or any property which is not your main residence.
The CGT annual exempt amount for individuals is currently £12,000. Gains in excess of this are charged at 10% or 20% depending on your other income. (These rates are 18% and 28% for residential property).
Entrepreneurs’ Relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.
The Conservative manifesto didn’t detail any change to the main rates of CGT, although the party said it wanted to “review and reform Entrepreneurs’ Relief”. It is not clear yet what (if any) changes will be announced. However, there have been calls from some quarters, including the former head of HMRC, Sir Edward Troup, to scrap Entrepreneurs’ Relief altogether. Others have suggested reducing the cap on lifetime gains to £1 million and tightening eligibility to stem abuse.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 gov.uk, January 2020
2 HMRC, August 2019
3 HMRC estimates, December 2019
Frederick Charles Wealth Management Limited.
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