Tony Medcalf, tax partner at MHA Moore and Smalley, looks ahead to the Budget on October 29 and assesses the likelihood of various tax changes.
A question on many lips is how can the chancellor set a budget for next year in the absence of a Brexit deal?
With the budget having been brought forward from its usual late November berth, many were wondering if this was because government anticipated having a deal agreed in principle by this time.
I think they were keen to capitalise on the prime minister’s “austerity is over” declaration with an optimistic budget. But with a draft Brexit deal still not having materialised, I think we could now be in for a low-key budget speech.
Will personal taxes rise?
There’s been speculation this will be the budget where the government rolls back on its much publicised 2015 election pledge for ‘no VAT, income tax or national insurance increases’.
But big tax rises are not the Conservatives’ style and the chancellor will be hoping for increased economic growth to achieve the required increase in revenue. If they want to stay true to the mantra of ‘work hard and you’ll be rewarded’, that comes down to not taxing people too much.
Instead of headline tax rate rises, some have predicted personal income tax allowances could be frozen. The government had pledged to increase this allowance to £12,500 for lower rate tax payers and £50,000 for higher rate tax payers by 2020, though a freeze could save up to £2bn a year.
Are we set for a raid on pensions tax reliefs?
There’s talk the chancellor will reduce pension tax reliefs, the funding of which currently costs almost £40bn.
Essentially, pension tax relief is a bonus paid by the government to incentivise people to save into a pension. Basic rate tax payers get a 20 per cent top up on what they save, higher rate tax payers get 40 per cent, and additional rate tax payers can claim 45 per cent.
The cost of funding these tax reliefs has increased significantly due to auto-enrolment pension legislation and is expected to hit £41bn in 2017-18. It is possible then the chancellor may be looking at pension tax relief as an area where savings could be made.
What other personal tax changes are possible?
When Mr Hammond last proposed an increase in National Insurance Contributions for self-employed workers, it was met with a stiff backlash, so I can’t see the chancellor going there again.
However, I think one area he will act is where people claim self-employed status as a ‘personal service company’, but in fact they may be in full employment. This so-called ‘masked employment’ is estimated to cost the Treasury millions of pounds a year.
Therefore, I think the chancellor will look to tighten up the IR35 legislation to ensure people being employed as private contractors pay the right amount of tax. HMRC estimates a similar move in the public sector has raised an additional £410m in taxes since 2016, so there’s a clear incentive.
What might Budget 2018 mean for corporate tax rates?
I wouldn’t be surprised to see the Conservatives up the ante on corporation tax in this budget and propose further reductions, despite calls from Labour for corporate tax rates to increase.
Reducing corporation tax is one of the few things Mr Hammond could do to give businesses confidence at this uncertain time. And if you’re serious about continuing to attract investment from around the world in a post-Brexit era, this would seem logical.
Increasing capital allowances and reducing business rates are two other measures that have long been called for by the business community, but I doubt the chancellor has that much leeway.
Will we see any giveaways?
The prime minister has already announced the freeze on fuel duty will continue. All the indications are there will be limited room for ‘giveaways’ in this budget, and I suspect any nuggets offered will be small and funded by tax rises elsewhere.
The Conservative think tank Onward recently suggested government should reward buy-to-let landlords for selling homes to long-term tenants, the incentive for landlords being they wouldn’t need to pay 28 per cent Capital Gains Tax. Instead the profits of their capital growth would be shared with the tenant to enable them to fund the purchase.
Another idea put forward by the Residents Landlords Association is to refund landlords the additional three per cent stamp duty should they sell to a sitting tenant.
For a government that talks frequently about the need to broaden home ownership, these proposals may be something worth looking at, though they are just ideas at this stage.