What can we expect from the budget? by Dougie Watson
We recently witnessed the swift and surprising departure of Sajid Javid shortly before his Budget was due to be delivered. This move prompted an expectation of a delay, but our new chancellor, Rishi Sunak, confirmed otherwise with his tweet on 18th February, “Cracking on with preparations for my first Budget on March 11”.
In the lead up to his debut Budget, I thought I would take the opportunity to summarise opinions from across the industry about some of the changes we might expect from the new Chancellor of the Exchequer.
Pension tax relief cost the government £37.2bn in the 2017-18 tax year. One idea is that Rishi Sunak might introduce a flat rate of pension tax relief, scrapping the current higher rate relief for a flat 20% rate. This move could save the government an estimated £11Bn in pension tax relief, but it is not seen for many as an incentive to save and could put further pressure on the middle earners through increased income tax.
Whilst controversial, a flat rate relief could also help reduce complexity for higher earners, effectively giving a pathway to scrapping the tapered annual allowance rules. The latest reports suggest the chancellor may have already abandoned this radical plan due to pushback from Conservative MPs. However, I wouldn’t rule out reforms in some capacity aimed at reducing complexity and increasing fairness in this system.
Other radical ideas hinted at could include a reduction to pension tax free sums and revision of the very generous tax treatment of inherited pension pots, in exchange for reduction or abolition of Inheritance Tax.
A cross-party group of MPs has called for cuts to inheritance tax, and a shake-up to the way it works with the IHT system branded “outdated” and “complex”. We could see reductions in the main rate of IHT applied (currently 40%) and the group is calling for gifting rules to be scrapped in an effort to stop owners of larger estates avoiding taxes by giving away their wealth and surviving seven years. The group also proposes a £30,000 cap on cash gifts over a lifetime to again avoid the rules being circumvented. We may also see some reforms to business property relief (BPR).
Amendments to Entrepreneurs’ Relief (ER) are now widely expected and speculation as to possible changes include: an increase in the current 10% rate of tax on gains from disposals of qualifying business assets, a decrease in the lifetime limit of £10 million, and the complete abolition of the relief altogether.
Income Tax & NICs
Although the government spending plans are set to rise, there is a good chance that there will be no immediate increases in income tax rates or NICs. The threshold at which National Insurance contributions will start to be paid is expected to be increased to £9,500, as previously announced. When the prime minister was campaigning in the last election, he promised to raise up the NI threshold to £12,500, but this rise is not expected immediately, rather over a number of years.
Plans to raise the rebranded “National Living Wage” to £8.72 an hour are already in place and come into force from April but it may be possible that this Budget includes more ambitious longer-term plans. This will help boost consumer spending and there may be further measures to help consumers. During the last election campaign, then-chancellor Javid pledged to set a target to increase the national living wage from £8.21 to £10.50 by 2024.
In the weeks running up to a Budget, we normally have a good idea of the spending changes we could expect plus some of the changes that analysts and commentators think might be included. Due to the last minute change of chancellor, this years Budget throws up uncertainty we don’t usually encounter and predictions appear far more speculative.
If this new government is going to make radical changes to taxes and spending, we would expect now to be the time that these plans are put in place. Our new chancellor’s first Budget could be the most important fiscal event in years, so stay tuned and lets see what happens on March 11th!