Sarah Coles, personal finance analyst at Hargreaves Lansdown, outlines five things that she says she does not want to see in the Budget.
- A cut to the pension lifetime allowance.
- A haircut for the pension annual allowance.
- The dividend allowance in the frame again.
- Students loans being repaid from a lower salary.
- Tinkering around the edges.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says:
“Chancellors tend to spend most of their lives between a rock and a hard place, and Rishi Sunak faces the Budget with things looking both rockier and harder than usual.
The government has been left with an enormous amount of debt after record peace-time government spending to tide us over during the crisis. Sunak has already announced higher NI to help pay for it, and made it clear that he’s not keen on any more tax rises at the moment. And yet, the threat of inflation means he can’t rely on cheap borrowing as his get-out-of-jail free card forever either.
There’s going to be a temptation to use this Budget to find alternative ways to spend less, and there’s a risk that in the process it could put more barriers in the way of people doing the right thing, by saving and investing for their future. There are five things we really don’t want to see in the Budget.
Instead, changes in the Budget should make it easier for people to do the right thing. The Treasury should focus on simplicity, by permanently cutting the LISA penalty, replacing the rules designed to stop pension recycling, and rethinking the rise in the Normal Minimum Pension Age.
- Any cut to the pension lifetime allowance
This would cut the government’s bill for tax relief, and because most people see £1,073,100 over a lifetime as the kind of sum that only bothers the very wealthiest, it would be unlikely to spark much of a backlash.
However, in reality, this isn’t a vast sum of money in pension terms, and many public sector workers could easily run up against the lifetime limit without thinking of themselves as particularly wealthy. It’s also the kind of retrospective taxation that makes it nigh-on impossible to do the right thing for retirement.
- A haircut for the pension annual allowance
A cut, for example from a £40,000 a year limit to a £30,000 a year limit, would save the government a chunk of tax relief, without worrying enormous numbers of people who can’t imagine ever paying this amount of money into their pension in a single year.
However, this kind of flexibility is vital for people who have had lumpy income during their career, who need to make up for lost time. Business owners, for example, may end up neglecting their pension during their working life, because they put everything into the business and plan to retire on the proceeds of selling up. Cutting how much of this they can put into their pension at that point could be a real blow.
- The dividend allowance in the frame again
The dividend allowance has only been around since 2016 and has already been cut from £5,000 to £2,000 in that time. Cutting it further would be a mistake, not least because the rate of this particular tax is already set to rise by 1.25 percentage points in April.
It would be a major blow for people running their own businesses and paying themselves in dividends. They’re already one of the groups who had least help in the crisis – cast out of the self-employment grant and furlough schemes. Many of them have already taken a serious dent to their financial resilience, so this would be adding insult to injury for a group that’s suffered enough.
It would also make ISA investments even more essential. The big advantage of sheltering investments within an ISA from day one is that it protects you from unexpected tax bills – however the government chooses to tinker with taxes on investment.
- Students loans being repaid from a lower salary
This would have a massive impact on lower paid graduates, many of whom have lost financial resilience during the pandemic, and are now seeing their budgets stretched to breaking point.
This change doesn’t have the same kind of emotive impact as raising tuition fees or the interest rate on loans – but neither of those would affect low paid graduates anywhere near as badly, because so much of their debt is eventually written off.
- Tinkering round the edges
The government asked the Office for Tax Simplification to review inheritance tax and capital gains tax. It has also looked at how NI works with income tax, and into the structure of tax relief on pensions. So far there has been little time and space for a carefully considered root and branch reform of any of them.
In the interim, there’s always the temptation to tinker around the edges, and free up a bit of cash here and there, but this kind of fiddling can cause needless complications and unintended consequences.”