Since the chancellor of the exchequer, Philip Hammond, announced that any major changes to fiscal policy would be announced in the Autumn budget, as opposed to the Spring statement, attention has turned to what these changes may be.
With Theresa May having pledged an additional £20 billion of annual funding to the NHS over the next five years, the money needs to come from somewhere; the answer to this question was promptly provided by Mr Hammond, who confirmed that the ‘somewhere’ will be the UK taxpayer.
Whilst a rise in income tax hasn’t been discounted, the general consensus is that pensions tax relief, which currently costs the Government £40billion a year, is the more likely target. In a report published by the Treasury Select Committee back in July, it was claimed that “pension tax relief is not an effective or well-targeted way of incentivising savings into pensions”, which sparked MPs to suggest that a reform of the current system should be considered.
Below we look at some of the possible policies that may be introduced across pensions and other tax wrappers.
One of the highly coveted options was to abolish higher rate tax relief and replace it with a flat rate system of 30%. This would have mainly affected the top 10% of taxpayers who currently receive an estimated 50% of all pensions tax relief. It was also muted that a flat rate would encourage lower-paid workers to save more into pensions at the same time as cutting the overall cost of tax relief for the Government. However, this was ruled out on 12th October due to a consensus that a more radical reform is needed.
Another option, and the most likely change according to Royal London, is that the annual allowance will be reduced by either £5,000 or £10,000 from its current level of £40,000. If a £10,000 cut was introduced, this would raise £500m a year and cost more than 100,000 higher earners up to £4,000 of tax relief per annum.
One final scenario is for a reduction in the tapered annual allowance for high earners. As it stands, those earning over £150,000 a year lose £1 of annual allowance for every £2 of income over the £150,000 threshold until the allowance is reduced by a maximum of £30,000, effectively taking their allowance down to £10,000. A reduction of between £25,000 and £50,000 has been discussed, either of which would result in an increased number of taxpayers seeing their annual allowance scaled back.
Following the introduction of ‘off-payroll working’ rules for public sector workers back in April 2017, in May of this year, the government launched a consultation document to determine whether self-employed workers and contractors who provide services through a company structure should also be taxed at source by their clients. With £410 million in extra tax having been raised through the public sector, it comes as little surprise that the same is being considered for the private sector.
With the government having commissioned a review by the Office for Tax Simplification into the processes involved in the IHT system, changes to IHT relief are potentially also on the Government’s radar. One target could be business relief, which allows business owners, or those with a share in a business, to pass on their assets at up to 100% IHT relief. This could also be widened to include Enterprise Investment Schemes which currently benefit from business relief on death.
Finura will post a full summary of all changes introduced in this year’s budget on 30th October 2018.
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