In advance of this week’s autumn statement there has been a lot of speculation about the measures chancellor George Osborne will use to meet his target for deficit reduction without damaging the economy.
Last month, the Institute of Fiscal Studies suggested Osborne may have to announce more spending cuts or tax increases or risk failing to achieve his target of reducing the level of debt by 2015/16. At the weekend, George Osborne conceded it is taking longer to tackle the problems with Government finances than expected.
Here are 10 measures Osborne has been tipped to include in the Autumn Statement.
Reduction of higher-rate tax relief
It has been widely suggested that Osborne is planning to reduce the annual allowance for tax relief on pension contributions from the current limit of £50,000 to either £40,000 or £30,000.
Figures from Standard Life suggest a reduction to £40,000 would save the Treasury £600m, while a reduction to £30,000 could save up to £2bn.
St James’s Place Wealth Management chief investment officer Chris Ralph says the annual allowance reduction will be an attractive target, not only because of the money it could save but because fewer than 100,000 people will be directly affected by it.
Removal of higher-rate tax relief
Another option to reduce the annual bill for tax relief is to scrap higher-rate tax relief completely, meaning 40 and 50 per cent tax payers would receive only 20 per cent tax relief on their pension contributions.
Institute for Public Policy Research director Nick Pearce says if all pension contributions were restricted to basic-rate relief, the Treasury could raise £7bn. But he believes a move of this kind would be unlikely.
Reduction of the lifetime allowance
The final option to curb pension tax relief would be to reduce the lifetime allowance for pensions from the current £1.5m to £1m.
Research from The Resolution Foundation reveales that cutting the lifetime allowance to £1m would raise up to £1.5bn a year.
Removing the ‘carry-forward’ allowance
The current ‘carry-forward’ allowance allows high-earners who do not use the maximum £50,000 allowance each year to carry the remainder over to the following year for up to a maximum of three years. However, this generous rule could be scrapped to coincide with the reduction in higher-rate tax relief.
Introduction of a mansion tax
Osborne ruled out introducing a mansion tax at the Conservative party conference this year and last month Downing Street ruled out any change to council tax bands.
However, Osborne is expected to announce further details on measures to clamp down on stamp duty avoidance by the wealthy and non-domiciled buyers.
From March this year, all properties worth £2m or more bought by companies were liable to stamp duty at 15 per cent.
In addition, details are expected on a proposed annual charge of between £15,000 and £140,000 and to introduce capital gains tax on the sale of residential properties owned by companies.
Baker Tilly profession practices group head George Bull (pictured) says once the annual charge is in play, only two changes will be required to convert it to a mansion tax – extending the scope to all residential properties and reducing the point of charge to £1m.
Bull says: “The Prime Minister has said that he does not want to see the council tax banding system extended to do the job of a mansion tax, because subsequent banding changes might impose harsh tax liabilities which are currently not intended. Interesting then, to see that the proposed annual residential property charge could so readily be converted to a mansion tax.”
Income Tax and personal allowance
There is only a slim possibility that the top rate tax of those earning £150,000 or more could see a further reduction from 45p to 40p.
However, Baker Tilly private client group head Gary Heynes says what is not announced is potentially more important that what is.
He points out that to offset the Coalition’s increases to the personal allowance, the threshold for higher rate income tax was reduced. If this is not adjusted for inflation, fiscal drag will increase the number of tax payers subject to income tax at 40 per cent. The same also applies to the individual threshold for inheritance tax.
Heynes says: “The inheritance tax threshold has been frozen since 2009/10 at £325,000 – it would be £364,000 next year if it had increased with inflation. Only around 15,000 estates are subject to tax each year, so that represents around £235m in extra receipts next year. Over the period this would have dragged in over £500m in extra tax for the Government.”
Introduction of GAAR
Details of the introduction of a General Anti-Abuse Rule are widely expected in the chancellor’s statement.
In 2010, the Treasury instructed Graham Aaronson QC to conduct an 11-month study of whether a GAAR would reduce legal uncertainty around tax avoidance schemes.
The report recommended that a GAAR should initially be applied to main direct taxes.
Cash basis for smaller businesses
Baker Tilly partner David Barton says the chancellor is expected to announce changes to income tax rules to allow small businesses to change the way they pay corporation tax to a simplified cash basis. The measure was proposed by the Office of Tax Simplification and should apply to businesses with turnovers of up to the VAT threshold of £77,000.
The Treasury has also been consulting on the suggestion from the Office of Tax Simplification to make it easier for businesses to disincorporate, or change their status from a limited company to self-employed.
Creation of ‘Employee-owner’ status
It is expected the chancellor will announce further details of his plan to create new ‘employee-owners’.
At the Conservatives annual conference in September, Osborne announced plans to allow ‘employee-owners’ to receive shares of between £2,000 and £50,000 in the businesses they work for in exchange for waiving their right to claim unfair dismissal.
At the Conservative party conference this year, Osborne announced that work and pensions secretary Iain Duncan Smith had agreed to £10bn in welfare cuts by 2016/2017. To hit that figure would mean the Treasury needs to find £6.6bn in 2015/2016, therefore it is very likely that the chancellor will announce welfare cuts in his statement.
Pearce says: “A freeze on working-age benefits in 2013/2014 and 2014/2015 is likely to get him the lion’s share of this, since it is like compound interest in reverse. If you cut the baseline in 2013/2014 and freeze it again in 2014/2015 then the net effect is high savings by 2015/2016.”