Will next week see Budget booby traps or crowd pleasing rabbits pulled from the Chancellor’s hat?

11 March 2016

Will next week see Budget booby traps or crowd pleasing rabbits pulled from the Chancellor’s hat?

With recent reports that the Chancellor has decided to back off his plan to scrap the current system of pension tax relief system, with an eye to quell dissent from restive MPs and voters already agitated by the Brexit referendum, opinion is divided over whether the Budget will now prove a damp squib for savers and investors or whether alternative measures will be introduced to reduce the cost of pensions reliefs.

David Smith, Director of Financial Planning at Tilney Bestinvest, looks at what the Chancellor could implement on 16th March and what it would mean to those affected.

“The Government sees pension's tax relief as a significant cost to the Treasury, at a time when the primary goal remains eliminating the UK Deficit. With the ‘ground zero’ of scrapping upfront pension's tax relief off-the-cards, for now at least, the Chancellor will need to think of more subtle and indirect measures to fill the gap. If history repeats itself, such policies may be difficult to spot as the Chancellor has previously come bearing gifts in one hand and a dagger in the other…

“Providing a healthy tax receipt of almost £5.5bn in 2013/14, Capital Gains Tax (CGT) is still considered one of the most beneficial tax rates for investors. Just a 2% increase in tax rates from 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers to 20% and 30% respectively, could pocket the Exchequer approximately £100 million a year. A step further could see CGT rates matching Income Tax rates of 20% (basic), 40% (higher) and 45% (additional). Such a move could be extremely lucrative for the Chancellor, especially as many buy-to-letters are looking to sell-up in advance of the soon to be imposed stamp duty hike. To soften the blow, the CGT allowance (the amount up to which an individual can ‘gain’ without being subject to tax) could be increased, which would appease the masses, but to those with assets of significant worth, family assets held for a number of years or for those with second properties, it could be devastating.

“VCTs and EISs are likely to be ignored having recently been subject to changes in the last Finance Act and the Chancellor has already promised reductions in Corporation Tax. With pension’s tax relief expected to remain untouched this side of the EU referendum, and if CGT goes unchanged, there remain very few avenues down which the Chancellor can go. Radical yet seemingly sensible, and touted for many years, the coupling of Income Tax and National Insurance could yet be the next port of call to help out with the Chancellor’s balance sheet. Many have called for this proposal in order to simplify an antiquated personal tax regime. Whilst the Chancellor may cite this as a principal reason, rest assured it will serve no other purpose than to unshackle his self-imposed ban on increasing Income Tax and National Insurance during this Parliament. A new singular rate; 33-35% for Basic rate taxpayers and 43-45% Higher rate taxpayers could be introduced. Effective savings on National Insurance contributions up to the Personal Allowance would be hailed as a good thing for the lower paid, but it would no doubt create significant earnings for the State in the long run.

“Whilst the underlying tax relief system of pensions may not be changing, don’t bank on pensions being completely un-tinkered with in the Budget. It is possible that further reductions in the Annual Allowance could be made; that is the amount that an individual can save into a pension each year, thus significantly reducing the amount of tax relief available, perhaps to £30,000. The Tapered Annual Allowance, the restriction on the amount of pension savings for the highest earners, could see the threshold of earnings above which it is implemented reduced from £150,000 to say £100,000. Whilst these may not provide as large a saving as the Chancellor’s much vaunted Pension ISA, they’re certainly easy pickings.

“The proposed introduction of the Second Hand Annuity market could also provide some significant tax receipts in the short term. The Chancellor announced last year that pensioners would at some point be able to sell their annuities, effectively giving up their incomes for life for the benefit of a lump sum. The key here however, is that this lump sum is likely to be taxable and rather than the State receiving tax over a number of years, it will receive it all up front. What’s more, such lump sums may push pensioners into higher rates of tax – boosting the Exchequer’s tax receipts further. We expect to hear more about this in the Chancellor’s speech next week.

“What is for certain is that cuts have to be made. The Chancellor’s credibility is on the line if he fails in his target of achieving a Budget surplus and with slower growth, tax receipts are under pressure. What is clearly evident however is that in this world where the Chancellor is looking behind the sofa for extra cash, it is imperative to utilise all tax reliefs, tax incentives and allowances available to ensure you get the most out of your finances. Every penny counts.”

To discuss the Budget or any other financial planning topic please contact David Smith on 0191 269 9970 / david.smith@tilneybestinvest.co.uk

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Important Information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.

This article is not advice to invest or to use our services. If you are in doubt as to the suitability of an investment please contact one of our advisers.

If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Press contacts:

Jason Hollands
0207 189 9919 / 07768 661382

Gillian Kyle
0203 818 6846 / 07989 650 604

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs over 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

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For further information, please visit: www.tilneybestinvest.co.uk

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.