Written by Shaun Moore, chartered financial planner at Quilter
Changes to capital gains tax
“Tinkering with CGT might be an option for Hunt as it is only paid by the minority (323,000 taxpayers in 2020/21), but time will tell how far he goes as some decisions could prove to be unpopular. For example, removing primary residence relief could be a step too far, although would raise a lot, so it is unlikely they will go for that.
“Two potential options are:
– Reducing the CGT exempt amount (currently £12,300)
– Aligning CGT rates to income tax
“Of the two options, aligning the bands is most lucrative for the treasury. If rates were increased, they would go from 10 to 20% for basic rate taxpayers and 20 to 40 or even 45% for higher and additional rate taxpayers.
“There is a property surcharge currently (8%) which may or may not be retained if rates aligned although one imagines the surcharge might go if the rates increase across the board.
“The alignment of rates would mean they at least double for all tax bands. Whilst it is hard to say the exact amount of revenue this would secure; you could go so far as estimating twice the tax take (currently circa £14bn). As always, it isn’t that simple, some pay a reduced rate of 10% on business assets and some pay the 8% surcharge on property already, but it could easily bring in significant amounts.”
Changes to the dividend allowance
“Tweaking the dividend allowance or scrapping it altogether could be one way to achieve some additional cash for the government. The dividend allowance was introduced to help savers and when it was reduced in 2017, the new £2,000 allowance still covered the majority of savers’ dividend income. Lowering it further will mean more and more people end up paying tax on their dividends.
“At present, you do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). You also get a dividend allowance each year, which is set at £2,000 per year and you only pay tax on any dividend income above this allowance. However, if Sunak and Hunt want to reduce the allowance this will mean you have to pay more tax on any dividends you receive and the amount of tax rachets up depending on what tax band you are in.
“If you are a basic rate taxpayer and they reduce the dividend allowance by 50% i.e., to £1000 then you will end up paying £87.50 more in tax. Similarly, if you are a higher rate taxpayer this rises to £337.50 more in tax and £393.50 if you are an additional rate taxpayer.
“If the government chose to scrap the dividend allowance altogether then a basic rate taxpayer will end up paying £175 in tax on their dividends. Meanwhile a higher rate taxpayer will pay £675 and an additional rate taxpayer £787.
“Dividends are a popular way of creating a regular income from investments and therefore reducing the allowance or scrapping it altogether could end up meaning those who rely on dividends for the bulk, or all of their regular income will see this taxed at a much higher level.”
Changes to the top rate of income tax and lowering the top rate of tax threshold
“When Truss took the step of lowering taxes for high earners in her disastrous mini budget there was uproar across the country and even from those it was intending to tax less. Sunak and Hunt may therefore see changing the top rate of income tax and lowering the additional tax rate threshold as a relatively safe option to both boost government tax revenue and prove either inconsequential or popular with the general public. However, these calculations do show that high earners will be thousands of pounds worse off if these changes are enacted.”
If the top rate of income tax rises to 50p, and if the tax threshold is lowered from £150k to £140k:
|150k threshold with 5% increase in rate|
|140k threshold & 5% increase|
Freezing income tax thresholds
“There are numerous thresholds that could be frozen to help increase the tax take and freezing the income tax thresholds may be on the cards. Our calculations show that if wage growth is on average 5% per year for the next five years but income tax thresholds remain frozen then someone earning £35,000 today will be £695 worse off in the 28/29 tax year and cumulatively £2,016 poorer over the five-year period.
“Similarly, if you earn £50,000 today, then you will be £3,403 worse off in the 28/29 tax year and in total be £9,765 poorer over the five-year period.
“Even with wage growth of just 3% per annum for the next five years, someone earning £35,000 today would still be £400 worse off in the 28/29 tax year and £1,178 poorer over the five-year period if income tax thresholds remain frozen.
“And with 3% wage growth someone earning £50,000 would be £1,939 worse off in the 28/29 tax year and £5,592 poorer over the five-year period.
|3% wage growth|
|Amount worse off after|
|Starting salary||1 year||2 years||3 years||4 years||5 years|
|5% wage growth|
|Amount worse off after|
|Starting salary||1 year||2 years||3 years||4 years||5 years|
“These calculations illustrate the power of fiscal drag and how freezing income tax thresholds is a form of stealth tax. Ultimately, if thresholds remain frozen for a number of years, then you will end up paying considerably more tax. Thresholds at present are meant to remain frozen until 2026 but with the cost-of-living crisis weighing heavy on government spending this could be extended.”
*These calculations assume that wage growth increases by 3 and 5 per cent per annum and compares the tax paid if current bands remain frozen against the tax paid if the personal allowance, the basic rate band, the £100k personal allowance taper limit and additional tax rate band all increase in line with wage growth.
Freezing inheritance tax thresholds
“Freezing IHT thresholds amounts to raising taxes via the backdoor and if Sunak and Hunt choose to extend the freeze for an additional two years it is likely to net an additional £1 billion for government coffers. The number of people having to pay IHT has risen for a number of years now and this is largely because house prices have increased at pace meaning more estates are dragged into the net due to their property wealth. While house prices may soon cool due to the never-ending list of financial concerns facing the UK such as inflation, energy prices and an unpredictable European war, this is unlikely to take the sting out of IHT bills for some time.
“The government are stuck between a rock and a hard place at the moment as they continue to have to cope with the significant debt it took on to cope with the pandemic but also now has the unenviable job of needing to help alleviate a cost-of-living crisis. Extending the frozen thresholds for an additional two years is an inheritance tax raid by stealth.
“It is also worth remembering that the gifting allowances have also not increased with inflation so it reduces people’s options for mitigating IHT too. If the government does choose to freeze IHT thresholds they should at least increase the gifting allowances, particularly in light of the cost of living crisis as this could help the flow of intergenerational wealth and take the sting out of the financial hardship many will be facing.”
“If the NRB were to rise with inflation, it would become the following:
Current NRB – £325,000
2026/27 NRB – £338,000
2027/28 NRB – £351,520
“Likewise, the RNRB would become:
Current RNRB – £175,000
2026/27 RNRB – £182,000
2027/28 RNRB – £189,280
Scrapping social care cap
After years of the government pontificating over what to do about a looming social care crisis it finally put forward the £86,000 cap. However, as a result of a now gaping black hole due to the pandemic and the cost-of-living crisis delaying the introduction of the cap or scrapping it altogether would save the government a considerable chunk of change. However, if it does this, we need to have a workable solution to social care as at present carers across the country are propping up the system and it will only hold for so much longer.
Jon Greer, head of retirement policy Quilter:
Freezing the lifetime allowance
“While everyone understands the precarious fiscal position the government finds itself in, changing the lifetime allowance (LTA) once again would add even more complexity to the retirement planning process. The allowance has been kicked around like a football since its introduction back in 2006, and many are expecting an additional two years to now be added to the freeze.
“The LTA was originally set at £1.5m as part of a plan to simplify pensions and replace a complex legacy of eight different tax regimes. It was a single number that established the maximum someone could build up their pension tax-efficiently, and was only supposed to impact a very small number of wealthy people. From there it was allowed to climb with inflation to reach £1.8m in 2011/12, before being lowered back down to £1.5m for 2012/13. In 2015, it was announced that the LTA would be cut from £1.25m to £1m from 2016/17 and tied to CPI from April 2018/19. As it currently stands, the allowance has been de-linked with inflation and is frozen at £1,073,100 until 2026.
“Our analysis, based on previous Treasury forecasts, shows a two-year extension would see pensioners hand over at least an extra £400m in tax, on top of the £990m forecasted to be raised by the five year freeze announced in March 2021.
“Some will argue that freezing the LTA by an additional two years is justified because pensioners haven’t been as adversely affected financially in the past couple of years in comparison to those of working age, and so they must pay their fair share of the costs. However, what this view fails to appreciate is that the lifetime allowance is a test on entry into being a pensioner. Someone who became a pensioner before the onset of the pandemic and the cost of living crisis seen in the past couple of years isn’t going to face a lower LTA if their pension is already 100% crystalised and they are withdrawing an income. Freezing the LTA will mostly impact people in the workforce today who are forced into retirement because they lose their job.
“Doctors will be among the hardest hit by the change, and the NHS could well suffer as a consequence as doctors may be encouraged to accelerate their retirement plans. We know that the previous reductions in the lifetime allowance were linked to a number of doctors leaving the NHS, or reducing their hours significantly, because many doctors see the Lifetime Allowance as a cap to their pension and the point at which they should consider retiring or reducing their workload.
“Should the freeze be extended as is widely expected, this scenario could begin to play out quite rapidly and the already rather complicated process of retirement planning will be made that bit more difficult.”
Scrapping the pensions triple lock
“Sunak and Hunt will no doubt be weighing up whether they honour the manifesto promise of keeping the triple lock in place or opt to increase the state pension by a different measure in the face of a very difficult and uncertain economic outlook. While it will be expensive to keep in place for April 2023 given it is set by the September 2022 inflation figure of 10.1%, it may prove just too politically damaging to scrap it. However, looking further ahead the Bank of England has predicted inflation may drop to 7.9% by Q3 next year, so keeping the triple lock in place may prove less expensive from 2024. Should the triple lock remain in place, the state pension could rise to the following:
|Full New State pension||Basic State pension|
|CPI Sept (assumed)||7.9%|
Weekly figures rounded to the nearest 5p.
“Pensioners across the country will be eagerly awaiting the budget with hope that the previous commitment to the triple lock will be honoured, particularly given the low increase of 3.1% they received in April 2022 when inflation was already around 9%.
“The triple lock is proving to be a political hot potato for the government, and Sunak will need to make a final decision either way by the autumn statement deadline to help pensioners plan for their finances, particularly at a time when inflation continues to soar and finances are so front of mind.
“Regardless of the outcome, the triple lock does not work for everyone, and perhaps it may be time to assess whether there is a fairer way to raise the state pension while preventing more people slipping into the poverty net and having to choose between heating or eating.”
Changing pensions tax relief
“Changes to pensions tax relief have been widely rumoured, with the main focus falling on higher and additional rate taxpayers.
“Ministers are said to be discussing cutting the rate at which income tax relief is applied to higher-rate taxpayers by half – reducing it from 40% to 20% by introducing a lower flat rate to match the current rate for basic rate taxpayers.
“Should the government make this move, reports suggest an additional £8 to £10 billion could be raised each year which could go a long way towards filling the government’s public finances gap. However it is unlikely they would benefit from it immediately given they would have to consult, its implementation would take time and furthermore it would prove highly unpopular with the core Tory vote and their own backbench MPs.
Changing the rules around the Money Purchase Annual Allowance (MPAA)
“Changing the rules around the Money Purchase Annual Allowance (MPAA) could represent an opportunity for the government to offer a carrot to the general public considering it is likely to be using a fair bit of stick elsewhere. There has been a 23% uptick in the number of people accessing their pensions amid the cost of living crisis. However, those who are must be aware that if you take income flexibly under the current rules then this could limit your ability to save again in the future. The MPAA will cap future money purchase contributions at just £4,000 per year, rather than the normal £40,000. So if you take income now but then later return to work, you might not be able to make full pension contributions to rebuild you pension savings without incurring a tax charge. There is a risk of a scarring effect on people’s savings, caused by them being forced to tap into their retirement pot early, but then also being prevented from recovering that funding gap when their finances are in better shape. We believe the Chancellor should relax the MPAA triggers for at least the current tax year in order to avoid this double-whammy for people forced to use pension cash in the crisis.
“According to the ABI, someone in their 50s on average earnings would only have to pay an extra £151 a month into their pension (above the minimum required) to exceed the MPAA. Paying more than £4,000 a year would mean having tax relief clawed back. This effectively punishes people trying to do the right thing and severely limits their ability to save for retirement in the future. It’s high time this inflexible rule was scrapped in favour of a general anti-abuse approach similar to that taken for existing pension tax free cash recycling rules, which gets to the crux of HM Treasury’s concerns.”