Chancellor Philip Hammond has a difficult balancing act ahead in his Budget on 29 October.
On the one hand, prime minister Theresa May has promised an end to austerity and more spending on the NHS in an attempt to win the hearts and minds of middle Britain. And on the other hand, Brexit could dent his revenue predictions and the UK’s books remain unbalanced.
In raising revenues, there are a number of obvious targets. Many experts believe that higher rate pension tax relief looks increasingly unsustainable and may come under fire. This may come through curbs in the annual allowance, or a reduction in the level of tax relief, possibly to a flat rate of 30 per cent. Tax relief has been in the spotlight before, but this may be the moment it finally goes.
Reform to stamp duty looks likely, given the sclerosis in the housing market. At the recent Conservative Party conference, the prime minister said it “cannot be right” that those who do not live in the UK can buy properties as easily as British residents, and there should be a new stamp duty charge of up to 3 per cent on buyers who do not pay tax in the UK. Estate agents hit back at the proposal, saying that it would hammer the property market. To date, taxation of second home owners and buy-to-let landlords appears to have done little to improve the market.
Here, experts give their views on some of the most important reforms Hammond might have hidden in his red box.
Pensions tax relief
Adrian Boulding, director of policy at NOW: Pensions
I’d urge the chancellor to adopt two principles for fair tax relief: Firstly, the means by which tax relief is paid – net pay or relief at source – should not affect the amount of tax relief paid. Secondly, savers should receive this relief automatically without having to ask HM Revenue & Customs for it.
To our mind, this solves two pension problems. It removes the anomaly whereby non-taxpayers in net pay schemes don’t get the tax relief that they would do in a RAS scheme and it stops those higher-rate taxpayers who don’t know that you have to ask for the extra higher rate relief from missing out.
It doesn’t need a wholesale reform of pensions tax relief either, just a little tinkering with HMRC systems.
We all know that Budget suggestions have to be paid for, so I suggest the chancellor funds solving the net pay anomaly by abolishing pensions salary sacrifice.
As well as raising some much-needed cash, he would be removing an administrative burden for employers at the same time, simplifying their pensions payroll procedures.
Kay Ingram, director of public policy, LEBC Group
Treasury sources have dropped a number of hints that pension tax relief will be cut to pay for extra NHS funding. The two options which appear most likely are a cut in the annual allowance from £40,000 to £30,000 and a reduction in the income threshold for tapered allowance from £150,000 to £125,000.
I would prefer no change at all: constant tinkering with pension savings tax just undermines public trust in pension saving. If I had to choose one of these options, the reduction to £30,000 is preferable to dragging more savers into the tapered allowance regime.
The taper allowance is a stealth tax: individuals cannot control the rate of accrual of their pension and are often taken by surprise when receiving an unexpected tax bill. Doctors are affected by this and some are leaving the NHS as a result of no longer being able to receive the benefit of tax relief on their pension savings.
It would make more sense to abolish the taper allowance. It overcomplicates retirement planning and if business owners and managers cannot take part in their company pension schemes on the same basis as everyone else, it discourages good governance.
The other possibility is a reduction in tax relief to a flat rate of, say, 30 per cent. Hopefully, Treasury officials have listened to employers and pension providers who would find this difficult to administer. It would also make pension saving less affordable for higher and top rate taxpayers who would not get full relief on pension savings, creating a cash flow problem which may deter many from saving for their old age.
Alan Collett, fund manager of the TM Home Investor fund
There are rumours we might see reforms to Help-to-Buy in the Budget, which would be good news. Although the initiative had the worthy intention of helping first-time buyers on to the property ladder, evidence suggests it is now increasingly benefiting higher earners. It has also encouraged demand for housing, leaving buyers facing strong competition for eligible properties and fuelling price rises.
Help-to-Buy would be less necessary if higher loan-to-value ratio mortgages were not more expensive. Replacing the higher mortgage with a five-year interest-free loan from the government only helps if earnings growth allows the buyer to repay the government without crippling cost at the end of the period. We would welcome initiatives to encourage developers to build more homes for younger households.
There are also signs that the “one-size-fits-all” 3 per cent stamp duty land tax surcharge applied to the purchase of second homes and rental properties is adversely affecting supply. An exemption for institutional investors, as is already found in Scotland, would support a more balanced approach.
Michael Martin, private client manager, Seven Investment Management
I think we will hope for, and see, a “steady the ship” Budget. Perhaps there will be some increase in the inheritance tax rate to get rid of the complexity of the residence nil rate band, and just give everyone a £500,000 allowance.
An increase to the capital gains tax allowance would be nice, but we don’t see any chance of that.
Equalisation of the capital gain allowance on property to 20 per cent might free up a bit of stock.
I would like a return to the £5,000 dividend allowance – it kept a lot of people out of tax and simplified the system.
Rachael Griffin, tax and financial planning expert, Quilter
If the government does not have a green paper to offer on Budget day then it will need to be ready to answer some questions.
The success of auto-enrolment in the pensions world has not gone unnoticed and so it makes sense that other savings issues, such as adult social care, would seek to tap into that success.
If you put a social care contribution rate at 1 per cent, then a person who is aged 25 today on an average salary would have a pot of about £56,000 in personal provision.
If the system is to truly replicate pensions auto-enrolment then the government needs to consider the universal funding it can offer, similar to the state pension, and how it would fund it.
A cross-party group of MPs has suggested a social care premium paid by people aged 40 and above. This could build a pot of money that would fund a set universal benefits of a certain amount a week for those that need care. The money from this premium would have to be held in a ring-fenced fund so that taxpayers would be confident this money will not end up in a government slush-pile of funds.
Death benefits and inheritance tax
Tom Selby, senior analyst at AJ Bell
Anyone with a defined contribution pension, such as a Sipp, who dies before age 75 is currently able to pass on their entire unused fund tax-free to their beneficiaries – provided the money is transferred to their beneficiary within two years of them dying.
If someone dies after their 75th birthday, tax is charged at the beneficiary’s marginal rate of income tax. This regime was introduced alongside the pension freedoms reforms in April 2015 and replaced previous rules which meant pensions were hit with a 55 per cent tax charge on death. Given the fiscal pressures currently facing the chancellor, it would not be surprising to see this come under review.
A slightly more technical tweak we could see at the Budget involves the decisions people are required to take when accessing their 25 per cent tax-free lump sum. Under existing rules anyone who wants to take a lump sum from a DC pension must first “designate” how they want to take an income from it. This could be through the purchase of an annuity providing a guaranteed annuity for life or taking a flexible income through drawdown.
A third option, known in the jargon as uncrystallised funds pension lump sum, allows you to take chunks of your money out and receive 25 per cent of each chunk tax-free. The FCA, the City regulator, has recommended the Treasury reviews its rules and consider “decoupling” tax-free cash. If introduced, this would simply mean you could take your tax-free cash from your scheme without making a decision about how you want to take your income.