Budget giveaways and money savers - Hammond’s fiscal high-wire act

8 November 2017

Philip Hammond’s first post-election Budget speech is likely to be finely balanced.

The Chancellor will be keen to offer giveaways where possible, particularly to younger voters who gave the Conservatives a bloody nose at the general election. However the economy is hardly on a tear at the moment and Hammond will be equally keen to demonstrate the Conservatives’ commitment to spending discipline. Any extra spending therefore will almost certainly need to be funded by cuts elsewhere.

With exactly two weeks to go until Budget day, Tom Selby, senior analyst at AJ Bell, looks at the areas the Chancellor might turn to in order boost the Government coffers and the areas he might reallocate those resources to:

Potential money savers

Pensions – higher rate tax relief

“As sure as night follows day, so rumours of cuts to pension tax relief precede the Budget. Higher-rate tax relief could be scrapped altogether while an age-based system has also been mooted which would see younger workers get a bigger tax boost than older workers.

“Scrapping higher rate tax relief altogether would be incredibly complicated when you start to think about applying it to workplace pensions and would have a significant impact on the saving potential of middle England who won’t consider themselves particularly wealthy.

“A 30 year old higher rate tax payer saving £500 a month would lose out on around £115,000 by the time they are 65 if pension tax relief was restricted to the basic rate.

“Scrapping higher rate pension tax relief just for older workers would also have a significant impact.  A 50 year old higher-rate taxpayer saving £1000 a month and planning to retire at age 65 would be £62,474 worse off in retirement.”

Pensions – annual allowance

“It seems more likely that the Chancellor will go after the annual allowance (set at £40,000 a year) or the lifetime allowance (currently £1million). The annual allowance is ‘tapered’ down for anyone with total relevant earnings above £150,000, reaching a floor of £10,000 for those with total earnings of £210,000 or more.

“The lifetime allowance is due to increase in line with inflation in April 2018 to £1,030,000 so it feels unlikely this will be cut, although by no means impossible.

“The annual allowance would be the simplest tax relief lever to pull, and cutting this from £40,000 to £30,000 or even £20,000 – in line with the ISA allowance – would only hit the wealthiest savers.

“Alternatively, the point at which the taper kicks in could be lowered so more high earners are caught by a lower annual allowance.”

Pensions - death benefits

“One area of the pension tax regime that remains very generous following pension freedoms is the way death benefits are taxed.  In most cases pensions can be passed on tax free if someone dies before age 75 and subject to income tax of the beneficiary if I they die post age 75. 

“However, these rules are massively misunderstood by savers.  Our research suggests that only 4% of UK adults who have a personal pension understand this tax treatment, with the majority (58%) admitting outright that they don’t know how their pension will be taxed on death.

“This suggests a change to the death benefit rules could be pushed through without a huge amount of reaction from the voting public and could raise a significant sum for the Chancellor.  After all, pensions are designed to provide an income in retirement so arguably on death they have achieved their purpose.”

The personal allowance

“The personal tax-free earnings allowance has almost doubled from £6,035 in 2008/09 to £11,500 in 2017/18. Under current plans this will rise to £12,500 by 2020/21. The last rise in the personal allowance (from £11,000 to £11,500) cost the Exchequer around £2billion a year*, so a further £1,000 increase would cost the Chancellor billions at a time when he can least afford it.

“Given the price tag on hiking the personal allowance there might be a temptation to delay the increase to £12,500 or even halt it altogether.”

National Insurance Contributions for the self-employed

“It is inevitable that this will be looked at again at some point, given the inequity in the levels of NI paid by the employed and self-employed when put in the context of a flat rate state pension. 

“However, the wounds may be too raw from the last attempt to tackle this and the Government’s position is even less secure than it was when this policy was first announced.”

Potential giveaways

ISA allowances

“British savers will be keeping an eye out for any increases to the contribution limits to ISAs.  However, given that the main ISA contribution amount was increased significantly to £20,000 a year just 18 months ago, any increase here might be wishful thinking.

“If the Chancellor wants to specifically target younger voters, an increase to the annual Lifetime ISA allowance might be more realistic.  The LISA only launched in April this year and there are still very few providers offering it.  An increase in the amount people can contribute each year to say £5,000 (currently £4,000) would be a boost to younger savers and may encourage more providers to enter the market.

“To further encourage a long term savings culture in Britain, the Chancellor could also consider increasing the amount that can be contributed to Junior ISAs each year.  This currently stands at £4,128 and is linked to inflation, but if the Chancellor were to increase the LISA limit to £5,000 he could align the JISA allowance with this.”

Increasing the pension contribution limit for non-earners

“Another simple change the Chancellor could look at announcing is an increase to the amount non-earners can pay into a pension. This limit is currently set at £3,600 and has been in place for well over ten years, so is overdue an increase.

“Given the Money Purchase Annual Allowance is now set at £4,000 it would make sense to bring the non-contributory limit up to this level and in the process at least marginally reduce the complexity of the UK’s pension tax framework.”

Stamp duty holiday

“The Chancellor will be very keen to include something that can help people get their foot on the housing ladder.  Stamp duty is a significant barrier for many people and so a stamp duty holiday for first time buyers, combined with a potential increase in the LISA allowance, could go some way to solving the home ownership equation for younger people.”

* https://www.gov.uk/government/publications/spring-budget-2017-documents/spring-budget-2017

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