The Budget – what might the Chancellor have up his sleeve?

Less than a year ago, Chancellor Rishi Sunak presented his first budget, barely 4 weeks after being appointed to the role and at a time when the pandemic was upon us but no one could have known how long it would last.

Next week he is due to address the nation once more. This will take place at a time when the vaccine rollout is going well, there is some light at the end of the tunnel in terms of easing the lockdown restrictions but when we are by no means out of the woods. The crisis has taken a huge toll on the public finances, fuelling expectations of tax increases, so what might the Chancellor have up his sleeve? Gary Smith, chartered financial planner at Tilney, gives his views.

“The past year has been unlike any other and has left the Government with many hard decisions on how to continue helping people affected by the pandemic and how to begin to pay back the vast debt. While some radical measures will no doubt be needed in the future to help ease the debt burden, I don’t personally believe this will happen in this Budget due to the country still being in lockdown and the pandemic is not over yet. I suspect that the sting in the tail might come in subsequent Budget statements, although the Chancellor might set out a future road map of likely tax increases.

“Pensions – I do not believe there will be any changes to pension tax relief this time round; this may come as a surprise but I suspect that this might be covered in the Autumn. Reducing tax relief at this stage would hamper pension saving at a time when the need to save is greater than it has ever been owing to the dents in pots caused by the pandemic. In particular, changing the tax relief available on pensions could have a negative impact on NHS members, and this could be viewed as a kick in the teeth for those who are doing their all to save Covid patients.

“Wealth tax – there have been rumours that personal allowances and higher rate tax threshold could be frozen at £12,500 and £50,000 respectively in a raid that could bring in up to £6 billion. This will cancel out planned tax relief with the average family forecast to miss out on a £250 p.a. saving by 2024/25. Although no tax rates are being raised, I believe this would still cause too much of a voter backlash for the Chancellor to introduce at this time.

“That said, there are a few areas where we could see some changes.

“Capital Gains Tax – speculation is rife that that CGT rates could increase to be in line with Income Tax rates (20%/40%/45%) along with a reduction to the annual CGT allowance of £12,300. Such changes would impact those who might currently have investment properties that they are considering selling in the future, investments held outside of ISAs and pensions or those selling a business. The real impact of any changes to CGT will depend upon how much the annual allowance is tampered with, and there has been talk that this could be reduced to as low as £2,000. Some would argue that bringing CGT tax rates in line with income tax rates is fair, but others will point out that capital gains are a result of risk taking and that the country needs to encourage its competitiveness as a place to invest. An increase in CGT might be on the cards but would likely face a backlash with Conservative voters.

“Inheritance tax – the future of inheritance tax and lifetime gifting allowances was being looked at prior to the Covid pandemic, with talk of a reduction in the 7-year gifting rule to 5-years, with no tapering. I definitely feel that this is an area that could be revisited, especially as the legislation could be simplified by amalgamating the nil rate and main residence nil rate bands. Given that the Chancellor has to raise taxes, I wouldn’t be at all surprised to see some changes in this area.

“Dividend tax – might we see the scrapping of the £2k dividend free tax allowance? Could he increase tax on dividends, falling in the basic rate tax band from 7.5% to 10%? This would increase the tax take to the exchequer and move things further towards equalising tax between those who receive salary and those who take their remuneration through dividend payments.

“ISA allowance – One option could be to cap the amount saved into tax-free ISAs, such as introducing a lifetime limit as is the case for pensions. Annual ISA allowances of £20,000 are very generous but it would ruffle a lot of feathers to cutting them at this point.

“Stamp duty – The Stamp duty holiday introduced last year could be extended by six weeks to prevent thousands of home buyers being caught in a ‘completion trap’. This will help alleviate fears that sales will fall through after the 31^st March deadline expires.

“It will also be interesting to see if any measures are added in purely on the back of the pandemic. For example, is the furlough scheme likely to be extended as we still have no concrete date for when certain businesses will be able to fully re-open? And could we see an NHS tax – the introduction of a 1 or 2p increase on income tax rates, with this increased revenue purely being used to fund the NHS? There are lots of very big decisions for the Chancellor to make and while I do not think we will see them all next week, it will be very interesting to see what he does. I would like to see the Chancellor do something that will help our retailers and businesses in the hospitality sectors survive the coming months ahead, and enable them to thrive in the future. As ever, please get in touch with your financial planner with any queries.”