What might we see in the 2018 Budget?
25 October 2018
With the Chancellor due to unveil his latest Budget on Monday, industry experts have been discussing what they would like to see announced, as well as what measures they expect to emerge from the red briefcase.
ISAs have grown increasingly complex in recent years and there have been calls from those in the industry to simplify the product in order to attract consumers.
Adrian Lowcock, head of personal investing at Willis Owen, says the introduction of a whole range of ISAs by the previous Chancellor has caused much confusion among savers.
He commented: “The original ISA was successful because it was simple. Therefore, we would recommend taking the product back to basics before savers and investors are put off even further than they are already.”
Rachael Griffin, tax and financial planning expert, Quilter, echoes the sentiment: “Preferably in this year’s budget, rather than further tinker with these types of products, ISAs should be left alone or if anything, combined so that more flexibility is offered within a single ISA – the so-called Everything ISA. Reducing the amount of different types may help to iron out some of the odd quirks in the rules surrounding ISAs.”
Capital Gains Tax
Lowcock has called upon the government to reduce the rate of Capital Gains Tax on property by 8% to 10% and 20% for basic and higher rate taxpayers respectively.
He said: “Reducing the rates would encourage sales of investment properties and would free up much needed housing stock for first time buyers. This would also provide opportunities to shelter the proceeds from property sales within tax efficient investments like ISAs and pensions.”
Tim Walford-Fitzgerald, private client partner at H W Fisher & Company, said the biggest move in terms of personal taxation is likely to be around national insurance.
He commented: “Having realised that abolishing Class 2 National Insurance for the self-employed would leave a lot of such people worse off, the Chancellor may well look at what he can do around Class 4 National Insurance.
“Ultimately, it’s unlikely that he will want to lose much in the way of actual revenue. Given the significant backlash that surrounded the aborted plan to increase in Class 4 National Insurance rates last year, I suspect that the most likely move will be around a combination of the National Insurance thresholds and rates.”
With Hammond under pressure to find a way to fund the £20 billion additional funding required for the NHS, Walford-Fitzgerald suggests one way to do this would be to increase the additional National Insurance charge on earnings or profit paid by both the employed and self employed above £46,350 from 2% to 3%.
He added: “On its own this may not be enough but given the Chancellor doesn’t appear to be ruling out tax rises – the rumoured cut to income tax/hike in personal allowances has also apparently been scrapped – so hiking the top rate of National Insurance by 1% may go some of the way to providing him with the funds he needs.”
Following comments by Chancellor Hammond that the cost of pension tax relief is ‘eye-wateringly expensive’, Royal London expects the Budget to include measures to ‘salami slice’ pension tax relief, but believes it will stop short of a radical reform.
The mutual insurer said a combination of big spending pressures, particularly to meet the £20 billion per year needed for the NHS, the difficulty in raising other taxes and the sharp cost of pension tax relief to the government would make a cut in pension tax relief highly likely.
However, a cut to the annual limits on allowable pension contributions could affect more than 100,000 high earners by up to £4,000 each.
Steve Webb, director of policy at Royal London, said: “Time and again, pension tax relief has been the go-to source of money for cash-strapped Chancellors. Pensions should be a long-term business where people can plan with confidence for their retirement, knowing that the tax rules around pension saving will be stable. But the Chancellor will find it hard to raise other, more visible forms of taxation and is likely to revert to the salami-slicing of pension tax relief.
“We fear that the amount people can contribute into their pensions each year will be cut yet again, sending out entirely the wrong message at a time when we need people to be saving more, not less.”
Lowcock believes it is becoming increasingly likely that further reductions in the annual allowance will happen.
He said: “The annual allowance is already gradually tapered away for individuals with income of over £150,000. It could be that we see a reduction in the threshold where this tapering applies. In the past, some changes to pension tax relief have taken effect from the date of the budget announcement.”
Lowcock said he was in favour of scrapping the lifetime allowance as part of a “fundamental overhaul” of pensions.
“Most of the time, new sets of rules add a greater and unwelcome level of complexity which only exacerbates the original problem. Introducing a flat rate of tax relief would make them appear fairer whilst the lifetime allowance should be scrapped to allow investors and savers to benefit from the growth of their investments and encourage people to save enough for their retirement.”
But according to Steven Cameron, pension director at Aegon, the government would be wrong to target pension tax relief, despite it appearing a big ticket item.
“Pension tax relief is often seen as the big prize, but we believe it would be risky for the government to rush into fundamental changes right now. Moving to basic and higher rate taxpayers receiving the same rate of government top-up would be extremely complex to introduce and needs proper focus and attention.”
Jon Greer, head of retirement policy at Quilter, said that rather than arbitrary cuts to allowances, it would make more sense for the government to target outdated factors.
He explains: “HMRC currently requires defined benefit pension schemes to multiply the annual pension by a factor of 20 when calculating the capital amount to be assessed against the Lifetime Allowance. This then led to the original £1.5m lifetime allowance set back in 2006 by Gordon Brown. To allow people to plan for their future, Brown said the allowance would increase every year to reflect inflationary increases, a promise that was kept for five years.
“However, the conversion factor has not been touched meaning it is now vastly out of date with the current transfer values on offer and has also meant there is a discrepancy in tax treatment towards defined contribution and DB pensions. Changing the conversion factor would arguably rebalance the current discrepancy.”
The spotlight has also fallen upon corporation tax, with the government appearing keen to appease businesses in light of ongoing Brexit negotiations.
Toby Ryland, corporate tax partner at H W Fisher & Company, said a reduction is a possibility: “While corporation tax is due to fall to 17% by 2020, the Chancellor could reduce corporation tax further to as little as 12.5% particularly if the chances of Britain crashing out of the European Union without a deal look greater than the chances of securing a deal. Even if corporation tax were to be cut to 12.5% of 15% the likelihood would be that what companies can write off as losses would be reduced in order that the Treasury ultimately still collects the same amount of revenue.”
Lowcock agreed a reduction could be forthcoming: “We wouldn’t rule out promises to reduce rates further to encourage big businesses to stay in the UK post Brexit which would be great news for businesses and investors in UK companies.”
Quilter’s view is in agreement. The wealth manager said: “If he’s feeling generous, Hammond could look to massively decrease corporation tax to attract more overseas money and to paint Britain as a favourable place for businesses to set up shop, despite there being some potential hurdles when it comes to exports and imports.”
While Brexit negotiations have dominated the government landscape in recent months, with its bandwidth severely limited as a result, Aegon has warned that social care funding must remain a priority.
Steven Cameron, pension director at Aegon, said: “Our ageing population urgently needs a stable agreement on what the state will pay for and what individuals will have to fund themselves based on their wealth. While implementing a new approach may need to wait until after Brexit is done and dusted, our society can’t afford to keep pushing important policy discussions into the long grass.”
According to Cameron, without this certainty, it makes it impossible for individuals to plan their finances effectively for later life.
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