THE CHANCELLOR rejected Halloween and Bonfire Night as dates for his Budget, but will Monday’s unusually timed speech bring any scares or fireworks for our personal finances?
The latest figures on public finances are said to be giving Philip Hammond more wiggle room in balancing the Government’s promises. But a radical tax-cutting Budget to pave the way for Brexit, as proposed in some quarters, is unlikely to appeal to the Chancellor or square with the Government's promise of £20 billion for the NHS and no uplifts in fuel duty or national insurance.
Richard Stone, chief executive at The Share Centre, said: “After holding tightly onto the purse strings for some years, the demands to relax that grip a little and spend a bit more are reaching a crescendo that the Chancellor cannot ignore. This will leave little room for manoeuvre on the tax side of the equation.”
There could even be a temporary retreat on the pledge to raise the personal allowance to £12,500 and the higher-rate tax threshold to £50,000 by 2020, according to Adrian Lowcock at investment shop Willis Owen. “Given spending promises, a U-turn on this shouldn’t be completely ruled out,” he said.
That said, Mr Lowcock believes it is more likely that the Budget could bring a cut in the £2,000 annual tax-free dividend allowance. “This allowance was slashed from £5,000 in April 2018, but a further cut to something in the region of £1,000 wouldn’t be out of the question, particularly if there is a need to offset cuts in corporation tax,” he said. “The dividend allowance is important to investors who hold shares or units outside of ISAs and pensions, and further cuts could encourage more investors into growth, rather than income-oriented stocks.”
Another innovation of Mr Hammond’s predecessor George Osborne was the savings allowance of £1,000 a year (£500 for higher rate taxpayers), which means savings of £50,000 (or £25,000) are tax-free up to a 2% interest rate. That giveaway costs the Treasury up to £500 million a year, but tampering with it would upset savers and shake up a regime that is still just in its third year. Mr Stone warned that as the household savings ratio has fallen by around 4% – its lowest level in 50 years – the allowance could be protected because the Government needs to do more to encourage savings and investments,
Those working in the pensions arena are hoping Mr Hammond will look at ways of encouraging more long-term saving, with Aegon noting that a big gap in savings policy is the lack of support for the self-employed, who do not benefit from employer contributions to a workplace pension.
Pension director Steven Cameron said: “Auto-enrolment has done a great job of making workplace savings the norm for employees, but for the self-employed there’s no equivalent and no great incentive to save.”
That said, Tim Walford-Fitzgerald, private client partner at tax accountants H W Fisher, predicted movement on national insurance rather than savings incentives.
“Having realised that abolishing Class 2 National Insurance for the self-employed would leave a lot of such people worse off, the Chancellor may well look at what he can do around Class 4 National Insurance,” he said. “It’s possible the Chancellor will raise the Class 2 threshold to something in the region of £9,400, rising to £10,200 by the end of the Parliament, while at the same time announcing a steady annual 1% per year increase in National Insurance Class 4 contributions to 12 per cent over the same period.”
Currently the self-employed pay 9% Class 4 contributions on annual profits of between £8,424 and £46,350, and £2.95 a week Class 2 payments where profits are above £6,205.
Mr Hammond’s recent remark that tax relief on pensions was “eye-wateringly expensive” has intensified the customary pre-Budget rumours that it will be reformed. Earlier this year the Resolution Foundation, in its report on inter-generational unfairness, argued that a ‘flatter system’ would help solve wealth inequality, calling for tax relief to be cut from 20% to 18% for basic-rate payers but from 40% to 28% for higher-rate payers. However, as a flat rate of around 30% would penalise higher-rate payers in favour of lower earners the Chancellor may well baulk at the idea.
Mr Cameron said: “Moving to basic and higher-rate taxpayers receiving the same rate of government top-up would be extremely complex to introduce and needs proper focus and attention. It would also be a big electoral gamble for a party without a majority.”
Former pensions minister Steve Webb, now director of policy at Royal London, added: "I don’t think it is something a politically weak government can introduce at this time.”
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