With a national deficit of £155bn and only £6.2bn of savings already clearly earmarked in the budget proposals – what can you expect, when the chips go down on Tuesday 22nd June?
Here is our roundup of budget changes already announced, of budget proposals that appear likely, and of other possible government budget cuts to come.
Pensions: removing compulsory annuitisation, gradually increasing the current retirement age, improving occupational pension schemes and restoring the link between state pensions and earnings.
Government has quoted figures from the Office for Budget Responsibility to show that the costs of expensive public sector final salary pensions schemes, such as those in the civil service and other public bodies, will more than double to £9bn by 2015. Calling these ‘unreformed gold plated’ pension schemes ’unfair’ and ‘not affordable’, a review has been promised as a matter of priority.
Government may be planning budget changes to scrap compulsory annuitisation, removing the legal requirement to buy an annuity with your pension savings by age 75. This will give those with large pension pots of £100,000 or more the option to hold on to their money, perhaps leaving it invested in the stock markets in an ‘income drawdown’ arrangement, rather than hand it over to an insurer. Realistically these budget changes will make little difference to the average punter, whose pension pot of £50,000 or less is still most likely best used to purchase a lifetime income through an annuity.
Basic State Pension – restoring the link to earnings will help ensure that the Basic State Pension will increase ahead of inflation, and in line with the national average wage. The state pension is guaranteed to increase in 2011 in line with prices, earnings or 2.5%, whichever is the higher.
Pensions Tax Relief: those paying tax at 40% or 50% on parts of their income can currently regain that as tax relief on pensions contributions. If you pay tax at 40% and invest a £6,000 lump sum as pensions savings, you could receive £4,000 in tax relief. A 50% taxpayer investing £5,000 as pension savings could get tax relief of £5,000 (subject to anti-forestalling rules). This may all change with the budget changes on June 22nd, as higher-level tax relief is seen as a primary target for government cuts.
Income Tax: government has pledged budget changes to help lower earners by increasing the personal allowance i.e. the amount you may earn before tax. Currently £6,475, government budget proposals promise an increase to £10,000. However, there is no indication of the timing on this, it could be phased in over several years.
National Insurance: clashes over Labour proposals to hike NI contributions by 1% became one of the bloodiest battlefields for the previous administration. The Tories were extremely opposed to the 1% increase for workers, but may still impose a 1% increase for employers instead, using the increase of the tax-free allowance to £10,000 as a sweetener.
Capital Gains Tax: government budget cuts could raise capital gains tax from the current 18% to 40%, or even more on June 22nd. The annual capital gains tax exemption, meanwhile, could be cut from £10,100 to £2,000. While government is not expected to backdate these changes, it is not expected to delay them either.
Capital Gains Tax applies, not to the overall value of an asset, but to the increase in value of an asset since you acquired it. It applies to the profit you make from selling a second property, whether a buy-to-let or a holiday home, to gains from art or antiques, or to gains made from stocks and shares investments. It even applies to gifts – if you gift your home to your daughter, without a penny changing hands, there is still no escape from CGT, which will be calculated on a valuation of the property. If you bought a second home 10 years ago for £50,000 and can sell it now for £150,000, you will be taxed on the difference, i.e. on the profit or gain you have made – in this case £100,000. Last year you would have owed £18,000 in CGT; government budget proposals may now raise Capital Gains Tax from the current 18% to bring it closer to 40%, in which case you could soon face a tax bill of £40,000 on that house sale. This is why so many landlords have been rushing to sell their properties lately, before any such budget changes kick in.
These increases in Capital Gains Tax are primarily intended as government budget cuts to tax the better-off, but could affect many average earners too. Employees who receive shares as part of their company benefits package would be taxed at the new levels, on the gains they make from selling their shares. Government has promised to prevent the capital gains tax increase from hitting the elderly. This may protect those who have purchased a second property as one strand of their retirement planning. It may also protect residents who have been in nursing homes for longer than 3 years, who would otherwise have found that their family home was deemed to be a secondary residence, and subject to Capital Gains Tax, when they came to sell it.
One solution to CGT increases are Enterprise Investment Schemes. EIS schemes allow you to defer CGT by investing your gains for three years or more tax-free. As such, they are a ‘shelter’ from CGT for as long as you are invested in the EIS scheme.
Inheritance Tax: the original budget proposals to raise the IHT threshold to £1m are now gone, it will now remain at £325,000 for a single or £650,000 for a couple. As part of the round of government budget cuts, this may be frozen, to allow inflation to push more people over the threshold.
Venture Capital Trusts (VCTs): VCTs offer tax-incentivised investments in smaller British companies. They currently give a 30% up-front tax relief on investments of £3,000 – £200,000, although shares must be held for 5 years to retain the relief. Government budget changes may increase tax reliefs on VCTs to encourage investment in small industry, and in particular in the green technology sector, which was singled out for support through budget proposals in the coalition manifesto.
Are you interested in more information on how the budget proposals will affect you on 22nd June? Contact us now with a financial advice enquiry or ring 0800 678 5929
