Next week’s Budget is the last before Britain’s exit from the European Union in March 2019, meaning media and public scrutiny of the Government is high.
Speculation about what Philip Hammond will announce on 29 October has been fuelled by Prime Minister Theresa May declaring the end of austerity to the Conservative Party conference early in the autumn.
Public finances are in better shape than for many years, with borrowing at its lowest level since 2007, but the Government needs to find an extra £20 billion a year for the NHS.
“Unless there are substantial tax rises, or much better-than-expected economic growth, the Prime Minister’s aim of ‘ending austerity’ is unlikely to be compatible with the Chancellor’s aim of balancing the books by the mid-2020s,” the Institute for Fiscal Studies warned at its pre-Budget briefing last week.
The announcement in September that the Government would not be scrapping Class 2 National Insurance Contributions after all perhaps was a sign that there would be no Budget “giveaways” this year.
Which set of taxpayers are likely to foot for the bill for the extra NHS funding? In the build-up to the Budget, higher and additional rate taxpayers were set to be the likely victims, with the Government set to remove the 40% and 45% tax relief on pension contributions.
This change has been discussed before many Budgets, but this could be the year that it is finally made. Shifting to a flat rate of pension tax relief is expected to save £10 billion a year.
Other possible changes to pensions could see a further cut to the annual and lifetime allowances, which have been reduced to £40,000 and £1 million respectively. As the Association of British Insurers points out, these allowances have already been subject to many cuts already – the annual allowance was £255,000 in the 2010/11 tax year and the lifetime allowance was £1.8 million.
As Hargreaves Landsdown’s senior analyst Nathan Long points out, both seem large ceilings to most average earners but further cuts will start to become a political issue to middle income Britain – even people will modest salaries have been, with the help of a prolonged bull market, able to amass pension pots in excess of £500,000.
Chancellor's £13bn Boost
However, this week’s newsflow suggests that taxpayers could be due a last-minute reprieve. The Office for Budget Responsibility, which publishes growth and borrowing figures alongside the Budget, is now expected to say that the Chancellor has an extra £13 billion at his disposal after rejigging forecasts.
Apart from the likely threat to pension tax relief, what are the likely Budget changes?
Willis Owen’s head of personal investing, Adrian Lowcock, makes the following predictions:
- A delay in planned increases in the personal allowance, the threshold before people pay income tax
- A potential drop in corporation tax to encourage firms to stay in the UK post-Brexit, perhaps to 15% from the current level of 19%
- A further reduction in the dividend tax allowance, which was slashed from £5,000 to £2,000 this tax year
Tim Walford-Fitzgerald, private client partner at H W Fisher & Company, believes the biggest move around personal tax is likely to be with National Insurance contributions: “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.”
The Chancellor could raise the threshold before self-employed people pay tax on their profits from £8,424 to £9,400. But, Walford-Fitzgerald warns that this lost revenue could be made up by an increase in tax paid on self-employed profits over £46,350.
