It started like the first paragraph of dystopian novel: “Tackling tax evasion, avoidance, planning and imbalances in the tax system.” Where tax is involved, thought crime will be illegal.
Following the Budget, we will see a root and branch review of pensions, attacks on buy-to-let landlords, and a reduction in inheritance tax. I don’t think I have a single client who will be unaffected, and some of the proposals and consultations have only a hint of the changes they will herald.
Firstly, you have to cut through the marketing spin: changes to the personal allowances and increases to the higher rate threshold may be triumphed by the right-wing media but they are really just petty tinkering. The higher rate threshold, for example, is set to increase by a less than 1.5 per cent.
Far more fundamental from a tax perspective is the changes to the dividend tax credit, the most fundamental changes to investing since the famous raiding of Isas and pensions by Brown. The “major and long overdue reform to simplify the taxation of dividends” will, for many, see them paying a greater of income tax on their investment. Basic-rate taxpayers currently enjoy their dividends, not tax-free as Osborne stated, but tax-paid, with the corporation tax deducted at source covering any liability.
Dividend paying investments will see a supplementary rate of tax of between 7.5-38.1 per cent on dividends over £5,000 per annum. As a firm we have always employed a “total returns” strategy, largely agnostic to dividend income, interest and capital growth. Those who have built six-figure valued income portfolios through shares and income funds will likely find a reduction in their returns, and have expensive capital gains tax costs to make appropriate changes.
Those who have an income provided by a geared property portfolio may be similarly affected, with the reduction of income tax relief on mortgage interest to basic rate tax only. Clearly the higher the borrowing, the greater the effect, but as a rule of thumb I could see a reduction of 10-20 per cent for many landlords, particularly those who have other sources of income. This may in turn have a negative impact in property prices, as net yields take a further battering. Not ideal when Osborne seems committed to a property-led recovery.
And where to begin on pensions: the abolition of pension input periods affects most pension savers, and the operation of the annual allowance and transitional rules are going to be absurdly complex. Many individuals who pay additional rate tax, either through reason of employed bonuses or self-employment will not know their earnings, and therefore their annual allowance until the end of the tax year, and often not until after.
So another Budget with yet more tinkering when in the very same speech a consultation is published on “strengthening the incentive to save”. Leaving long-term savings alone might be a good start.
Alistair Cunningham is director of Wingate Financial Planning