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Budget 2016: what the chancellor may have in store
George Osborne has taken pension tax relief off the table but that doesn't mean next week's Budget will be uneventful.
Pension tax relief reform is off the table for now and with the EU referendum pending, chancellor George Osborne doesn’t have a lot of manoeuvre at next week’s Budget.
On 16 March, Osborne will deliver his seventh Budget and according to Tina Riches of accountants Smith & Williamson he has been ‘encouraged by a few people to be boring’.
After two busy Budgets, the Treasury has already signalled that the most contentious topic – reducing pension tax relief for higher earners – will be left alone and tax experts expect this chancellor's statement to be a quieter affair.
Bill Longe, tax specialist at accountants RSM, said: ‘This year…the Budget augurs would appear to have been wrong-footed by the "Brexit" debate and the chancellor’s need to stay in the race to become the next prime minister.’
However, this doesn’t mean there won’t be any announcements and some smaller changes are still expected.
Income tax and national insurance (NI)
The Office of Tax Simplification has published a report criticising the current NI system as ‘not fit for purpose’ following a review on whether it should be merged into income tax to create a 'super tax'. The report concluded that rather than be merged, NI should be brought more in line with income tax.
Considering the OTS report has been published just a week before the Budget, Riches believes there could be an announcement next week that supports its proposals.
‘There has been pressure for the government to merge them but they may look to align them,’ she said. ‘They could change the calculation of NI so that it is done on an annual basis as currently it is done on a monthly basis.’
This would mean that NI is calculated like income tax, which is based on income for the year and if a person has under or over paid they can receive money back or owe more to HMRC. The monthly calculation of NI means those who earn variable wages month to month pay differing levels of NI.
Riches said there would be ‘winners and losers’ if the taxation was aligned but ‘in a way it would be better to know what you are paying’.
Income tax rates
In the last Budget the chancellor said he was keen to increase the threshold at which workers start paying 40% to £50,000. It currently kicks in at £42,385 and next month will rise to £43,000 but as a gift to the middle-classes, Osborne may commit to raising it more quickly, said Gary Heynes, also of RSM.
‘Quite how far the chancellor can afford to raise the threshold now that his plans to reform pensions tax relief have hit the buffers remains to be seen,’ said Heynes. ‘However, demonstrating progress on delivering his manifesto commitments should play well with the party faithful at a time when he is looking to boost his leadership credentials.
‘If the rise in the 40p threshold were to take effect from April this year, it would also provide a welcome bonus to middle income earners who he is hoping to woo in the lead up to the EU referendum.’
Riches said the Budget will also provide a chance to clear up two anomalies within income tax. As the personal allowance – the part of your income on which you pay no tax – tapers away by £1 for every £2 of income over £100,000, an effective tax rate of 60% is paid on income between £100,000 and £121,000.
A similar problem happens for those with children around the point at which child benefit is taken away between £50,000 and £60,000 of income. Income earned between £50,000 and £60,000 is hit by an effective tax rate of 50.8%.
Riches said it would be a chance for the government to ‘iron out’ a ‘quirk’ in the tax system that ‘would not cost them a lot of money’.
While tax relief changes have been ruled out of the Budget, that doesn’t mean that pensions will escape tinkering altogether next week.
There have been rumours that Osborne will make changes to the tax-free lump sum – the 25% of your pension you can take tax-free. The rumours have ranged from scrapping it entirely to capping it to a certain sum.
‘His targets may include reducing the amounts that can be paid as tax-free lump sums, which according to recent studies costs the exchequer a whopping £6 billion [a year],’ said Longe.
‘Another target may be the use of salary sacrifice schemes which is difficult to justify. Other than sacrificing pay for pensions, which reduced the NI contributions bill for both employers and employees, there are other easy targets including free parking for employees.’
Riches said she ‘would not be surprised’ if the government brought in measures to tackle salary sacrifice but said the problem is that stopping salary sacrifice would hit the private sector hardest, as it is not used in the public sector.
‘In the public sector you do not have defined [pension] contributions going in [to a scheme via the employer], only the promise that you will get a pension relative to your final salary,’ she said.
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