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What’s in store for advisers in Osborne’s second Budget?


By Mark Sands and Sam Brodbeck

Now that the date has been set for Chancellor George Osborne’s second Budget of the year, the Government has an opportunity to simply rubber stamp the many financial services pledges the Conservatives made pre-election.

The 8 July Budget means that beyond the longer-term wrangling over EU membership and new powers for Scotland, the promises made as part of the Tory manifesto will be brought into sharp relief.

But without the shackles of a coalition partner, could the Government go further than commitments made in the midst of behind-closed-doors negotiations with the Liberal Democrats?

The Queen’s Speech, set for May 27, is expected to lay the foundations for the new Government’s agenda, but it may be that further details are kept for the second Budget.

Here, Money Marketing sets out the pensions and taxation policy issues advisers should look out for.

Fundamental reform

Tax relief on pension contributions has long been in the firing line, with HM Revenue & Customs putting the cost at £27bn in 2013/14.

In his March Budget, Osborne announced plans to cut the lifetime allowance from £1.25m to £1m from April 2016, with increases linked to the Consumer Prices Index measure of inflation from 2018.

In their manifesto the Tories revealed plans to raise the threshold for inheritance tax, and pay for it by cutting pensions tax relief for high earners.

But experts are calling on the new Government to launch a review to fix the “broken” pensions tax relief system rather than tinker around the edges yet again.

Prior to taking office as pensions minister Ros Altmann said the lifetime limit has “never made sense” to her as a policy tool”. Experts are also warning the Government’s plans risk exacerbating the divide between defined benefit and defined contribution pensions.

KPMG partner and Association of Consulting Actuaries chairman David Fairs says: “The pensions taxation system is so complicated now it’s effectively broken. I’d like to see a proper review with a view to making it simpler and more equitable.”

Royal London group chief executive Phil Loney says the centrepiece of the Tory proposals – to taper the annual allowance for those earning over £150,000 from £40,000 to £10,000 for people earning over £210,000 – “doesn’t really make sense” and “sets a dangerous precedent”.

He says: “The Government is saying to people if you want to save more than £10,000 a year then we are going to tax your income twice. That is a really bad principle and the problem is that sort of thing can end up filtering down and inevitably someone else will get clobbered.”

But Aegon chief executive Adrian Grace thinks the system needs to be equalised.

He says: “It is not fair richer people get a better offer than poorer people, it is not right and it should not be allowed. We need radical simplification of the system that standardises the rate across the board. That will engage people to put more money into their pensions.”

Former pensions minister Steve Webb favoured a flat rate of relief at around 30 per cent – a “buy two, get one free” model – but when former Tory MP Mark Hoban publicly supported the idea, his party distanced itself.

The Government’s plans could also drive a greater wedge between DB and DC pensions. At today’s rates a £1m lifetime allowance will allow someone with a DC plan to purchase a pension worth about £25,000. But because of the way lifetime allowances are calculated, a DB scheme member would get an income of around £50,000.

Towers Watson senior consultant David Robbins says: “Some people might say there should be an annual limit for DC and lifetime limit for DB. The problem is, how do you stop that system being more generous for people who have access to a mixture of DB and DC, compared to people who can only do one or the other?

“It gets very messy indeed if you have different regimes. How do you make different sytems talk to each other and stop people getting more relief than you’d like them to get? There are no easy answers here.”

Tax clampdown

Experts say the July Budget will also see Osborne bring tax evasion and non-doms back into the spotlight, partly in a bid to soften the expected blow of widespread cuts to the public sector.

Osborne is likely to introduce a number of austerity measures early in this Parliament, with the Conservatives committed to finding £12bn in savings from the welfare bill over the next five years.

The Tories boasted of plans to raise £5bn from tax evasion and avoidance during the election campaign. Association of Chartered Certified Accountants head of tax Chas Roy-Chowdhury says Osborne may begin by tightening the general anti-abuse rule, having already announced plans to introduce penalties for violation in March.

“At the moment the GAAR is right on the outside of all the anti-avoidance measures, as the moat at the very periphery. They might draw that in so it is much more mainstream and used to catch more avoidance schemes,” Roy-Chowdhury says.

Others say Osborne may also increase charges paid by non-doms, which were already raised to a ceiling of £90,000 a year in the 2014 Budget.

These charges are defined by the number of years an individual has lived in the UK, and allow individuals to avoid paying tax on their earnings and capital gains outside of the UK.

Baker Tilly senior tax partner George Bull says Osborne may seek to either increase the charges imposed, or introduce a maximum number of years for which non-dom status can be claimed.

Plans from the Labour Party to completely bar non-dom status were jeered as “reckless” and “misguided”.

But Bull argues Osborne can avoid the same trap by preserving the non-dom status, but barring individuals from claiming after a longer time.

“The direction of travel is fairly clear in that the Conservatives will allow non-dom status to continue, but the question is how they will maximize the tax yield from it.”

Manifesto pledges

The Conservatives also have a number of pledges from the March Budget which failed to make it into law before the dissolution of parliament, including the new personal savings allowance, Help to Buy Isas, as well as the pledge not to increase national insurance, income tax and VAT.

The hangover of unimplemented polices and campaign promises has led some to speculate that the July Budget will have few surprises.

But Axa Wealth head of investing Adrian Lowcock notes Osborne has a track record of when it comes to Budget shocks.

He says: “One thing has been clear from Osborne’s previous Budgets is he has managed to surprise people time and again with improvements to pensions and Isas. I wouldn’t be surprised if he repeats this trick.”

Expert view

Listen to the early pronouncements from members of the new Government: unencumbered by the Liberal Democrats, the Conservatives are taking a noticeable change in direction.

Much of the talk seems to be about challenging providers on behalf of consumers. This seems to apply to both public and private sectors, with the NHS, the education system, unions, rail operators and yes, the financial services industry all put on notice that the customer comes first.

For the forthcoming Budget, expect to see announcements on personal taxation, welfare cuts, inheritance tax and pensions.

There was much in the manifesto on the intention to cut jobs taxes and to boost tax-free income for the lower paid (conveniently glossing over the fact this was a Liberal Democrat policy). So I would expect to see announcements on income tax and perhaps National Insurance too.

It is open season on pension cuts at present; could we perhaps see a banning of salary sacrifice or even the abolition of NI relief on employer pension contributions – all no doubt dressed up as cutting back on red tape. On this last point I am speculating, but the demands of politics can turn decent, honest, intelligent and public-spirited individuals into apparent idiots. I still do not fully understand how this happens.

A couple of anticipated Budget measures are worth focusing on. The plan to cut long-term savings incentives (pension tax relief for higher earners) in order to inflate the house prices of the wealthy by giving an IHT break to homeowners with properties up to £1m) is perverse and very hard to justify. Nevertheless they will probably do it.

Elsewhere, there is a strong case for cutting capital gains tax, as it would encourage investors to tidy up their portfolios, realise gains where it made investment sense and in the long run would probably generate more revenue for the exchequer. It is in this direction that good tax policy lies.

Tom McPhail is head of pensions research at Hargreaves Lansdown



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Rt Hon Sir Arthur Streeb-Greebling 22nd May 2015 at 9:27 am

    If I were planning to retire from the proceeds of advising on the Auto Enrolment boondoggle, I wouldn’t be bothering to iron too many shirts either. Shelf-life limited I would say.

  2. More buggering about with pensions. Spin about how well we are doing (not) and more stealth taxes having learned from Crash Gordon. How long before we get an attack on ISAs?

  3. I see Tom McPhail has been quoted in the article.

    Tom is one of the few true Gurus in the industry and invariably what he has to say are genuine pearls of wisdom, but in my view his comment on this is just way out.

    It has very rarely been about the consumer , and this time will I fear be no different. True it is dressed up as such with clever spin, but just taking the freedoms as an example the main intended beneficiary is the Treasury with the hoped for accelerated tax trawl. An unintended consequence (I’m being generous to George) is that the industry hopes to make a killing by being able to charge for continuing funds under management. As HL research on their own clients have shown – few have opted for an annuity – not surprising is it! I wonder what their direct mail was telling them?

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