Budget 2018 - five to watch
As the chancellor hunts down savings ahead of the Budget, what should you look out for?
The Chancellor has announced that the Budget will take place on Monday 29 October, earlier than has been speculated. It will be the final tax and spend speech before Britain leaves the EU, and will outline how the extra £20 billion a year for the NHS will be funded.
Tax relief on pension contributions has been at the mercy of cash-strapped chancellors for some time, but all have fought shy of reforming a system in which higher-rate taxpayers benefit most. Indeed, root and branch reform could be politically risky and take years to implement, so Mr Hammond may well see more ‘salami slicing’ as the answer.
The annual allowance for pension contributions came down from £255,000 a year, to £50,000 then £40,000. It could potentially be cut again, perhaps to £30,000. It’s also quite possible that the chancellor could lower the earnings threshold for the ‘tapered annual allowance’, which has so far only affected top earners. Both options would go some way to cutting the £50 billion spent each year subsidising pension saving through tax relief.1
2. Income Tax
Income Tax currently brings in around £180 billion a year, which makes up about a quarter of all tax revenue. Therefore, even a small increase in the higher and top rate could help the chancellor fund his extra spending commitments. A 1p increase in the basic tax rate is expected to generate £4.85 billion by 2021/22. A similar 1p rise in the higher rate and top rate will bring in £1.25 billion and £190 million respectively.2
3. Capital Gains Tax
Capital Gains Tax (CGT) rates are at historic lows, potentially making them an appealing target. The chancellor could, for example, bring CGT more in line with Income Tax. For higher-rate and additional-rate taxpayers, that could mean a rise from 20% to 40%, or higher. He could also be persuaded to cut the current tax-free threshold of £11,700.
4. Entrepreneurs’ Relief
This scheme allows people selling companies to pay half the normal rate of CGT (10% rather than the current top rate of 20%) on up to £10 million of gains. However, the Resolution Foundation has called for Entrepreneurs’ Relief to be scrapped, given that it benefits a relatively small number of individuals. The think-tank has even called it “quite likely the worst tax relief in the UK”.
As the National Audit Office has previously noted, the cost of Entrepreneurs’ Relief has been around three times as high as was predicted when it was first approved by Parliament. Scrapping it would give the government a £2.7 billion head start in funding its NHS pledge, but whether the chancellor chooses to heed the Resolution Foundation's advice and “take a long, hard look at Entrepreneurs’ Relief” remains to be seen.
5. National Insurance contributions
Mr Hammond has already tried, and failed, to raise National Insurance contributions (NICs) for the self-employed, so any further attempt to hike NICs is likely to spark the same firestorm that engulfed the Conservative Party in the spring of 2017.
Nevertheless, a 1% rise in the main employees' NIC rate would yield £4.2 billion in 2021/22, while a similar rise in the employers' rate would bring in over £6 billion.3 The chancellor could also be compelled to make earnings of those above State Pension age subject to NICs for the first time.
Pre-budget action plan
- The ISA allowance of £20,000 in this tax year remains one of the simplest and most popular ways to shelter money from any further liability to Income Tax or CGT.
- You should think about boosting your pension savings now by making the most of available allowances, so that you can potentially benefit from higher rates of tax relief on your contributions. It could also make sense to carry forward any unused allowances from the three previous tax years.
- Consider taking profits on some of your investments, so that you use up your CGT allowance of £11,700. By crystallising gains each year up to the limit of your allowance, you can reduce the risk of a larger CGT bill in the future. Better still, reinvesting the proceeds into tax-efficient wrappers such as ISAs and pensions can avoid any future CGT liability altogether.
- High earners can take steps to bring their taxable income down by making pension contributions or charitable donations.
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 HMRC, Personal Pensions Statistics, February 2018
2,3 HMRC, Direct effects of illustrative tax changes, 24th April 2018