The Chancellor is due to deliver his next Budget on 27 October, the second this calendar year. Increases in NIC and income tax on dividends from April 2022 have just been announced, and the corporation tax rate is also due to increase to 25% from April 2023. Will there be further significant tax rate changes, or will we see more of a tinkering around the edges, such as changes to allowances and reliefs?
NICs and income tax: recent announcements
Despite a manifesto commitment not to raise rates of income tax or NICs, NICs and income tax on dividends will both increase by 1.25% from April 2022, forming a new ‘health and social care levy’. As this was announced recently, further changes to income tax rates at the Budget seem unlikely. Targeted changes to income tax are a possibility, for example tackling specific income sources, or changes to allowances and reliefs. For some time, there has been speculation that NIC for the self-employed could be aligned with employee rates, but again, this now seems less likely to come in imminently.
Capital gains tax (CGT): an easy target?
The Office of Tax Simplification (OTS) review of CGT concluded in May, and the two reports recommended sweeping changes such as aligning CGT rates with income tax, removing the capital gains uplift on death, and reducing allowances. Other more technical recommendations include changes to what is defined as a capital gain as opposed to income, for example when extracting profits from a small company.
Significant increases to the CGT rate, or changes affecting small companies, could, however, risk discouraging potential entrepreneurs, stunting growth and job creation. Given the need for economic recovery, the Chancellor may protect reliefs that encourage investment and entrepreneurship. Options could be a smaller rate rise, say to 30%, CGT rate increases only on disposals of more passive types of investment, such as on rental property, as well as more technical changes to CGT reliefs.
Immediate changes are possible, so subject to investment decisions consideration could be given to accelerating planned disposals or gifts whilst the CGT rates are known and remain low. Alternatively, the Government could choose to give notice of a future increase to incentivise disposals and accelerate CGT receipts.
Any action taken in anticipation of changes does involve significant risk. For example, CGT rates may not change as you expect, although rates falling is very unlikely, action taken before the next Budget could be caught by a subsequent change.
Pension contributions: is higher rate relief at risk?
A concern before every Budget is the availability of income tax relief on contributions to registered pension schemes.
Currently, income tax relief on contributions is given at the taxpayer’s marginal rate, which for some is 40% or 45%. If the Chancellor chose to restrict this to the basic rate of 20%, or limit contribution allowances further, this could significantly affect retirement planning for many taxpayers.
Previous changes to tax relief on pensions include the tapered annual allowance, whereby high earners had a reduced yearly contribution limit, and the introduction of the lifetime allowance, with charges for taxpayers who exceeded the total contribution threshold. Both allowances are potential targets for ‘tinkering around the edge’ of pension tax relief and could be preferred over the removal of higher rate relief on the contribution itself.
Now is a good time to talk to your adviser about your pension position, and whether or not it is appropriate in your circumstances to make a pension contribution in advance of the Budget.
A potential increase in inheritance tax (IHT)?
Over the last few years, reports suggesting the reform of IHT have been published by the OTS as well as an All-Party Parliamentary Group. Particular areas focused on include the rules on lifetime gifts, the exemptions, and the CGT-free uplift on death.
Although with the residential nil rate band many estates are tax free, lifetime gifts form an important aspect of succession planning too. You may wish to review and discuss your succession planning with an adviser, and in particular, the timing of any gifts.
Tax administration strategy
Other significant structural changes are planned under the Government’s ten-year tax administration strategy, and we expect further announcements on these at the Budget. You can read more on how Making Tax Digital (MTD) for income tax and basis period reform, now delayed until April 2024, may affect the self-employed and partnerships here.
Given the impact of COVID-19 on the economy, tax rises have been anticipated for some time. While the Government focused on support measures few changes were made, although the last Budget did see the freezing of various thresholds until 2026. The announcement of the health and social care levy indicates that the Chancellor feels it is time to look to the future. NICs and income tax on dividends were unexpected targets, as the manifesto had committed not to increase these, so it is hard to rule out any changes, other than tax cuts.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.