With the spring Budget fast approaching, it will be interesting to see what the chancellor, Rishi Sunak, has in store for high earners.
The Budget comes at a difficult time for the UK economy due to Covid-19 and Britain’s departure from the European Union.
Figures published by the Office for Budget Responsibility (OBR) have suggested that borrowing could increase to £372.2 billion in the financial year ending 5 April 2021, slightly higher than the Institute for Fiscal Studies’ (IFS) forecast of £350 billion.
So, with a giant black hole in the public finances, Sunak has to perform a delicate balancing act. He is under pressure to raise revenue to pay for wide-ranging coronavirus support measures, without being seen as unnecessarily raising taxes to plug the nearly £400 billion public finances hole.
Here are seven things the chancellor could change in his forthcoming Budget.
Equalising Capital Gains Tax and Income Tax rates
Capital Gains Tax (CGT) is an area ripe for reform, especially after the recent recommendations by the Office of Tax Simplification (OTS). In its review, the OTS recommended a levelling up of CGT rates to bring them more in line with Income Tax rates.
As we wrote in the last edition, any gain you currently make on the disposal of most assets (with no adjustment for inflation) is added to your income to determine the rate of tax which will apply. This is currently:
- Basic rate: 10% on non-residential assets and 18% on residential property
- Higher and additional rate: 20% on non-residential assets and 28% on residential property.
If the government aligns CGT and Income Tax rates as part of a package of reforms, you could pay 20%, 40% or even 45% tax on gains. It’s worth noting here that people who pay CGT are twice as likely to be higher-rate taxpayers than those who do not.
If you are in the process of selling certain assets, you should consider using your CGT allowance of £12,300 for the 2020/21 tax year, and perhaps even crystallising larger gains to pay CGT at the current, historically low, rates.
Gifting assets with taxable gains to a child or grandchild is another way of using current allowances and rates.
Will the Stamp Duty deadline be extended?
The announcement of a Stamp Duty holiday last July led to a mini boom in the UK property market. According to Zoopla, the tax break resulted in 100,000 more transactions in the pipeline than normal.
The Stamp Duty holiday is due to end on 31 March. Despite some calls for the chancellor to extend the tax break, it looks likely that the holiday will end, as planned, at the end of March.
While the holiday has boosted the housing market, it has also cost taxpayers an estimated £3.3 billion.
For this reason, and because, according to a Treasury spokesperson, “it’s time-limited nature is what has encouraged people to take advantage of the scheme,” Sunak is said to be determined to ignore calls to prolong it.
If you are currently going through a house purchase, it might be worth accelerating the legal process to meet the March deadline. Missing it could cost you up to £15,000 in additional tax.
Corporation Tax increases – but perhaps only for larger businesses
Last April, it looked like the chancellor would cut Corporation Tax from 19% to 17%. In the current climate, this dream seems a long way off. Instead, it’s possible that Sunak could increase Corporation Tax to between 22% and 24%.
While this might not seem supportive of many businesses who are struggling in the pandemic, the chancellor could limit the rise to larger companies that have fared well during recent months.
Inheritance Tax reform
Inheritance Tax (IHT) has been on the government’s agenda for a while and it’s quite possible there could be reforms in this Budget.
The most likely change would be a reduction in the thresholds for the nil-rate and residence-nil rate bands, or a cut in the amount that you can give away during your lifetime. For example, the chancellor might place a “lifetime limit” on gifts. There could also be changes to Agricultural Relief and Business Relief.
If you have a potential IHT liability, then you should make any gifts (and use any allowances and exemptions) while they are at their current level. Changes to IHT are unlikely to make tax breaks more generous – and any reforms could come into effect in the 2021/22 tax year – so it could pay to act quickly.
Reduced tax relief on pension contributions
In recent months there has been a lot of speculation that the chancellor could reduce the tax relief available on pension contributions for higher earners. As it stands, it’s possible to benefit from up to 45% tax relief on pension contributions up to £40,000 per year.
If your threshold income is over £200,000, or your adjusted income is over £240,000, your Annual Allowance will be reduced by the taper.
Sunak could either reduce tax relief to the basic-rate level of 20% for everyone, or create a new, flat rate of tax relief, perhaps at around 30%. In either instance, if you’re a higher or additional-rate taxpayer then it’s likely you will lose some valuable tax relief. The chancellor could also further restrict the Lifetime Allowance.
Again, these changes could come into force as soon as April, so you should consider maximising family pension contributions at the current rates of tax relief, and fully utilising any unused allowance from the previous three years.
A rise in National Insurance contributions
While the Conservatives pledged in their manifesto not to increase National Insurance contributions (NICs), there are two groups who could be hit by higher NI bills this Budget:
- High earners: There is already an additional 2% NIC rate for higher earners, so the chancellor could introduce another even higher rate, or increase the rate from 2%.
- Self-employed workers: While Philip Hammond’s attempt to raise NICs for self-employed workers failed back in 2017, the current chancellor has made it very clear that he believes self-employed and employed workers should pay the same tax. Last March Sunak said: “If we all want to benefit equally from state support, we must all pay in equally in future. There is currently an inconsistency in the tax treatment of the employed and self-employed.”
- Funding growth for businesses
There is no doubt that businesses may struggle to borrow to fund growth post-Covid-19. So, the chancellor may relax the qualifying rules and increase investment limits for existing incentives such as the Enterprise Investment Scheme (EIS), Seed EIS, and Venture Capital Trusts (VCT).
These schemes offer valuable tax benefits, so any increase in the investment limits or improvements in tax treatment will be welcome.
In addition, Sunak may announce new schemes, while plans for a national infrastructure bank may be accelerated to support the economic recovery.
Get in touch
If you’d like to discuss ways of mitigating your personal tax or chat about what Budget changes might mean for you, please get in touch.