Next week’s Budget looms large as experts are anticipating wide-ranging changes, with chancellor George Osborne tweaking tax to raise revenue and balance the books. Pensions were widely anticipated to be an area of huge upheaval, but Osborne has now delayed plans to fiddle with the system. It’s more likely that lots of niche areas are targeted. Below, experts highlight the topics most likely to face change.
INCOME TAX BREAK
Osborne is reportedly considering increasing the amount people have to earn before they start paying the higher 40p tax rate to £43,000, from the current threshold of £42,385.
The chancellor is also rumoured to be planning a cut to the top rate of tax from 45p to 40p – a cut that would benefit individuals earning more than £150,000 a year.
CAPITAL GAINS TAX
It doesn’t court as much controversy as other taxes, but capital gains tax raised more for the Treasury last year than inheritance tax – over £5.5bn, according to St James’s Place.
It’s levied when people sell certain high value items, such as shares, second homes, art or jewellery. Gains above £11,100 are charged at 18 per cent or 28 per cent for basic and higher rate taxpayers, respectively. But some think Osborne could move those rates to match the income tax bands, of 20 per cent, 40 per cent and 45 per cent.
“Capital gains tax is becoming a bit of an anomaly,” says Rachael Griffin of Old Mutual Wealth. The rates were dropped to 18 per cent and 28 per cent a few years ago, but could be “easy pickings” for Osborne to raise more cash by bringing them back up again, she says.
The government previously announced a “triple lock” commitment, promising not to raise income tax, national insurance or VAT rates during this parliament. “The fact there is no mention of capital gains tax is interesting,” says Lucy Brennan of Saffery Champness.
At the moment, there’s no income tax or national insurance on redundancy payments up to £30,000. It’s a generous allowance, and is on Osborne’s radar for potential taxation.
“The chancellor has been consulting on whether this regime should be so generous, especially to those employees who have not had a long tenure of service before they receive a termination payment. He may look to bring these payments into the scope of national insurance, and introduce a ‘per year of service’ tax-free amount,” says Iain McCluskey of PwC.
“The reality remains that one man’s judicious tax planning is another’s immoral avoidance,” says Brennan.
The question of when tax planning becomes tax avoidance has been raised a lot recently, with the spotlight tending to fall on multinationals and their creative tax strategies. But HMRC has been cracking down on what it deems tax avoidance at all levels of society. Greater spending and more powers for HMRC to tackle perceived abuses by private individuals are likely to be announced.
SALARY SACRIFICE SCHEMES
Many employers offer so-called salary sacrifice schemes, whereby workers can pay for benefits such as extra annual leave, childcare or gym membership out of their salary.
People then pay tax on their salary after such deductions, so their taxable income is lower. Employers don’t have to pay national insurance contributions on the amount staff sacrifice, which can work out to huge sums for large organisations with wide-ranging salary sacrifice schemes.
These arrangements could be targeted to raise revenue, says John Harding of PwC. One option would be for national insurance to be levied on the salary sacrifice amount. “Employees could lose hundreds of pounds of savings, depending on the benefits selected,” he says.
From this April, people will be able to earn £1,000 interest on their savings and income from investments without paying tax. The allowance will be £500 for higher rate taxpayers.
Usually, when a new allowance is announced, investments held in trusts are given something. But that didn’t happen, and the £1,000 interest rule hasn’t meant an extra tax break for trusts, explains Griffin. Some experts think Osborne will tidy up the rules around how trusts are taxed at the Budget. “We may see clarification around these investment income rules, particularly in relation to trusts. We are still lacking detail around that,” says Griffin.
Life assurance products, particularly single premium investment bonds, are a popular choice for those who like having the option to take out lump sums or leave it all invested.
But there are complex rules around how much can be taken out before tax is due, and there have been many instances when savers are left with punitive tax bills after misunderstanding the rules. Many people need a financial adviser to oversee withdrawals.
This was the situation facing the Lobler family, who brought a case known as Lobler vs HMRC after mistakenly withdrawing too much, ticking the wrong box on a form and then receiving a massive tax charge. The system is likely to be cleaned up to make it easier for people without a financial adviser. “HMRC were embarrassed by the case,” Griffin says. “They want to ensure people don’t end up in this penal situation.”