What tax measures do we expect from the 2016 Budget?

  • Phil Williams
  • 26 February 2016 00:00

I've been involved in the writing the Mercia budget summaries for over 20 years now and I am often surprised that Chancellors are able to surprise us. This is particularly the case with the current Chancellor.

After all, he has told us:

  • what the personal allowances will be in the next two years
  • where the tax bands will be in the next two years
  • what will happen to income tax and NIC rates for the rest of this Parliament. The tax lock sets a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee Class 1 NIC rates, ensuring that they cannot rise above their current levels.

But since the General Election, George Osborne has surprised us with the new dividend regime in the July Budget and the hits on the buy to let sector in the July Budget and the Autumn Statement in November.

What won't be a surprise to many is an announcement to cut tax relief on pension contributions for higher rate taxpayers. The personal finance sections of many newspapers consider it a foregone conclusion that tax relief for higher rate taxpayers will be cut to 20% (or maybe 25%) from Budget Day or 6 April 2016. If it is cut to 25%, it is suggested that basic rate taxpayers will also be given tax relief at 25%. The government has recognised in its consultation paper on pensions tax relief issued in July 2015 ('Principles for reform'), that basic rate taxpayers are not saving enough for their retirement and it is considering how it can go further to ensure that individuals are supported to save.

Well, I'm going to stick my neck out here. It will be a surprise to me if this happens. There are a number of reasons for my view:

  • A far better control of the tax relief given to individuals is to restrict the total amount of tax relieved savings that can be made into pensions. The Chancellor has already done this - he has cut the Lifetime Allowance to £1 million from April 2016. When the Chancellor first got his hands on the nation's finances in 2010, the Lifetime Allowance was £1.8 million. The Lifetime Allowance doesn't mean that individuals can obtain £1 million of tax relief; it means the total accrued value of all the individual's pension funds is limited to £1 million. So total pension contributions over a person's lifetime of £400,000 and total investment growth above £600,000 creates a tax charge when the excess funds are accessed.
  • The restriction of tax relief will also require new tax law to charge all higher rate taxpayers to tax if they have employer funded pension contributions. To not have a charge will pave the way for a significant growth of salary sacrifice arrangements. I shudder to think of the complexities that will need to be introduced into the tax system to charge the considerable number of people in public sector defined benefit schemes who are higher rate taxpayers. I have yet to see this point considered in the personal finance sections of the newspapers.
  • If there is to be a fundamental change in the quantum of tax relief, the change will not come in quickly. In Chapter 3.7 of the consultation paper on pensions tax relief is the statement 'the government is clear that there is a need to proceed gradually'.

Let's see whether it is the financial journalists or me who are surprised on the 16 March.

PS I should add that, as a higher rate taxpayer, I have brought forward my pension contribution to before the 16 March (and if I was a basic rate taxpayer I would hold off until 16 March). You never know....

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