Carried over from March budget
Some tax changes announced in March did not make it into the speedily enacted Finance Act 2015. Of these, we expect to hear more about the pension ‘lifetime allowance’. Pension savings of more than the lifetime allowance suffer higher tax charges when paid out from the pension fund. The current lifetime allowance of £1.25m will reduce to £1m from next April. Will you be affected? Even though the average personal pension fund is less than £40,000, a surprising number of people will be caught by this change. The allowance will be held at £1m until 2018, thereafter to increase only by reference to the consumer price index. It’s reckoned that with a £1m fund an index-linked pension with widow/widower pension would be less than £30,000 a year. Those in final salary pension funds will also be affected, but less severely than personal pensions. Their notional pension fund is deemed to be 20 times the pension so they’ll only face the higher tax on pension income above £50,000 a year.
Business investment may also move higher up the Government’s agenda as the annual investment allowance (AIA) which remains in place until 1 January 2016, is under review. We know from the March Budget that the limit will not fall from its present £500,000 to the £25,000 limit of April 2012, which is very good news for business. The Chancellor said in his March Budget speech that “a better time to address the AIA would be in the Autumn Statement” but it would be no surprise if we were to hear more detail of his proposals in this budget.
New proposals for the new parliament
Pensions again. One of the proposals in the Conservative party election manifesto was to cut the annual allowance for those paying tax at the 45% additional rate of income tax. The £40,000 allowance will be tapered down so that for those with the highest income the allowance will only be £10,000 of contributions a year. We expect the really complex and possibly controversial implementation issue will be with final salary schemes as most of those affected will be highly paid civil servants.
Collecting more tax without increasing rates. The government has committed to not increasing several rates of tax. But they have to raise more revenue. Look out for changes, such as restriction of allowances, to increase tax collection.
More crackdowns on avoidance. We fully expect more opprobrium to be heaped on unacceptable tax avoidance. Further complications will be added to the tax system. The jury is out on whether such talk is merely crowd pleasing or whether measures will raise meaningful amounts of tax.
The million pound IHT threshold is sure to be the subject of further speculation before the Budget and a likely bone of contention afterwards. All that has been proposed so far is an additional £175,000 allowance, per person, for their only or main residence. For this to provide couples with a joint nil-rated estate of £1,000,000 will require the allowance to be transferable, presumably following the property to a surviving spouse.
The price of that new relief may be paid partly by restricting or abolishing the rule that allows deeds of variation of a deceased’s estate to be treated as if they were made by will for IHT purposes. Opinion is divided as to whether deeds of variation are a necessary and valuable safeguard for families where the deceased was unwilling or unable to make normal provision by will and whether there really is widespread scope for abuse.
Is the CGT rate yoyo about to spin back upwards? Attention focuses again on the differential between income tax and capital gains tax rates, especially at a time of continuing low inflation. Indexation remains with us for companies’ gains: could it make a return to individuals’ CGT?
Implementing other parties’ proposals
Expect to hear the Chancellor using words such as ‘hard working people’ echoing terms used in the general election. He may also recycle the increase of personal allowance to remove more low paid workers from income tax (although not NIC).
HSBC’s high profile announcement that it will review of the location of its head office and may quit the UK due to the bank levy may prompt consideration of changes to the structure or rate of this tax. It was intended as a mechanism to deny the benefit of falling UK corporation tax rates to banks. However, the way it is levied means that banks paying it may have obtained minimal benefit from the reduction in CT to 20%. The North Sea oil sector, which is denied the benefit of lower CT rates, benefits from the much simpler and more transparent approach of taxing such profits at 30%. Bank tax has been made very complicated with the loss of relief restriction rules. Might it be time for a review?