This year’s budget, due on 11 March, has been hard to read for a number of reasons: there was the last minute change of chancellor, from one whose intentions were clear to a relative unknown. The coronavirus crisis has also necessitated some emergency measures, with Rishi Sunak promising to take “firm action to support families, businesses and the public services”.
The chancellor also has a lot of expectant mouths to feed, such as those Northern constituencies who have ‘leant’ Boris Johnson their vote, plus promises on police and nursing numbers to fulfil. The Tory’s election manifesto pledged an increase in the threshold for paying National Insurance, saving workers earning more than £12,600 around £100 a year. Number 10 is expecting Sunak to loosen the purse strings after a decade of austerity.
There may be a little more leeway in the country’s finances. The Institute for Fiscal Studies (IFS) recently said the country was on track to record a budget deficit for the 2019-20 financial year, around £3.5bn smaller than forecast in December. That said, the think-tank warned that the gap between government spending and taxation income could be £44bn in the current financial year; plus, the UK still has a vast structural deficit. So there is leeway, but not too much.
Higher rate tax tinkering
That means the chancellor has to get his cash from somewhere. There have been the usual mutterings about abolishing higher rate tax relief. The same arguments have been rolled out against the tax perk ahead of all recent budgets: it only benefits the wealthy; people don’t understand it, so it may be less effective as an incentive; it costs a lot of money at a time when government finances are tight.
However, as before, the government may conclude that it is a political gamble too far and risks offending its core voter base. There are still steps it could take to reform the pensions regime. The IFS has suggested abandoning the ‘ludicrously generous’ tax treatment of inherited pensions. Hargreaves Lansdown head of pensions policy Tom McPhail has proposed a new model based around a ‘double your money’ system. Every pound an individual pays into a pension would be doubled, either by their employer or through a government top up. He believes this would get rid of some of the complexities of the current system.
The government may also seek to deliver a solution to the pension tax taper problem, which is hitting NHS workers. AJ Bell senior analyst Tom Selby says that taper can see the annual allowance of high earners reduced from £40,000 to £10,000 and has created capacity problems in the NHS, where senior doctors with generous defined benefit pensions have been turning down extra shifts for fear of being hit with huge tax bills.
Abolition of entrepreneurs’ relief a bold move
Another potential source of revenue for the government is the abolition of entrepreneurs’ relief. Estimates suggest this could save as much as £3bn, which could be deployed to shore up the Northern constituencies that the government is so keen to keep happy. The IFS has previously said that the relief fails to encourage investment and gives the wealthy an unfair tax advantage.
Nevertheless, the move would be controversial. Mike Cherry, the national chairman of the Federal of Small Businesses (FSB) has said scrapping the relief would “destroy the retirements of thousands of business owners over the coming years”.
He added: “The vast majority of those who claim entrepreneurs’ relief do so on sums of less than £1m, with an average saving of around £15,000. For many entrepreneurs approaching retirement today, their business is their pension. The few thousand they stand to save through this relief pails into insignificance when compared with the sums that many employees will gain through reliefs, the state pension and employer pension contributions.
“Removing entrepreneurs’ relief would disincentivise employee ownership – a model we know is proven to increase motivation and productivity levels – by taking a chunk out of the value of businesses as they’re handed over.”
BDO corporate tax partner Jon Hickman suggests reform may be a better idea: “It would be very bold to simply abolish entrepreneurs’ relief, but it may well be reformed to refocus it on longer term business investment – for example, by extending and/or phasing the holding period qualification rules and possibly the percentage holding requirements.” The FSB suggests reducing capital gains tax to zero on the first £1m of a business sale to protect this substantial majority of business owners and bring the relief in-line with the pensions lifetime allowance.
Mansion tax and IHT
The other two main areas of mooted reform are around a mansion tax and IHT. The mansion tax first became a possibility under Labour’s Ed Miliband and could be levied by central government or local authorities. Sajid Javid may have been in favour, but Boris Johnson (and perhaps, by extension, Rishi Sunak) reportedly is not. While superficially attractive as a source of revenue, it hits those that are asset rich but cash poor such as the elderly. However, it may be that it can be deferred and paid through the estate on death. It could certainly stimulate the housing market, where movement has been sluggish under the weight of stamp duty changes.
IHT may be the other area for reform. BDO’s Hickman says: “An all-party parliamentary group of MPs has recently recommended major reforms to inheritance tax – and echoed comments from the Office of Tax Simplification last year that IHT is far too complex and outdated. The chancellor might choose to increase the basic relief, the nil rate band, but collect more tax in the long term by removing/restricting complex reliefs (the main residence nil rate band, exemption for gifts out of income, business property relief qualifying rules etc.).”
The government chose to make relatively few commitments in its manifesto, giving the chancellor a free rein in the budget. However, at a time when the Brexit negotiations are about to start, it seems likely that Sunak won’t do too much to frighten the horses.
