The national insurance contribution U-turn means your perks are under threat. What do you stand to lose?
A £2 billion funding gap has been created by the government’s decision to abandon its unpopular plan to increase national insurance for self-employed workers. The shortfall will be made up through a new set of measures to be announced in the budget in November, the Treasury confirmed this week.Rachael Griffin, the tax and financial planning expert at Old Mutual Wealth, a financial adviser, says: “There is no magic answer as to how he can plug the vast hole. Chancellor Philip Hammond has limited levers available because he has to juggle the issues surrounding Brexit. The most likely course of action is that he will make a number of small changes.” Here we look at the options and their effects.
The government has already tweaked many niche areas of personal tax in an attempt to raise money. National insurance contributions will rise for employed workers on salaries above £43,000 from April, while redundancy pay in lieu of notice will have a new set of tax rules from next year.
The £5,000 tax-free allowance for dividend income, which was introduced last year, will be cut to £2,000 from 2018. Rules around tax on salary sacrifice schemes have been tightened, and the tax advantages associated with employee share status have also been removed.
George Bull, a tax specialist at RSM, the accountancy firm, says there has been so much “salami slicing” of niche areas of tax that people are experiencing tax fatigue. He believes tax evaders are the ones the government should go after next. “Tax evasion and the shadow economy costs the UK £11.4 billion in [lost] tax every year. The chancellor has to turn his gaze towards people who are consistently outside the tax system and don’t pay what is due.
“When we look at tax avoidance, which is technically legal, we have seen that HMRC has been given a lot of power and made huge progress. If you give them the resources they will do the job,” says Mr Bull.
This has not been increased for several years, and while raising it would be unpopular with people in rural areas and businesses reliant on cars, politically speaking it would be “dead easy” in comparison with other measures, says Mr Bull, although he does not advocate it.
An extra penny, or half-penny could be added to a litre of fuel, more for diesel, and could be justified by concerns over public health, he says.
Capital gains tax on homes
Under the main residence exemption, capital gains tax is not payable when someone sells their primary home. However, policy experts have mooted bringing homes into the tax many times.
Mr Bull, who does not support the idea, says some experts are arguing for some capital gains tax on homeowners who trade down for a smaller house. Another possibility is giving everyone a lifetime limit of capital gains tax on their main home, which would be eaten into every time they move.
Passing on a house
The government has introduced a tax-free allowance for those who want to pass on their home to direct descendants after they die. The £100,000 residence nil-rate band takes effect in April and will rise by £25,000 every tax year until 2021.
“One option is to freeze the increases, which could go some way to meet the shortfall, but it will not be immediate,” says Ms Griffin.
Pensions tax relief
Pensions cost the government £49 billion a year. Successive chancellors have chipped away at the system and incrementally taxed more of people’s retirement savings. An overhaul of pensions tax relief has been proposed for some time and was expected to be announced at the budget in March 2016. Steve Webb, the former pensions minister and director of policy at Royal London, a pensions company, says: “The reason they pulled it was the referendum. They didn’t want to frighten the horses in the run-up.
“The cost of pensions tax relief is going up because there are more people saving. The Treasury does not like this,” he says.
Pensions tax relief is applied at a person’s level of income tax, 20 per cent, 40 per cent or 45 per cent.
Critics say this system unduly favours higher-rate taxpayers, who receive double the tax relief of the lower-paid.
In addition, many higher-rate taxpayers go on to be basic-rate payers in retirement, so their pension savings receive a 40 per cent top-up, but are taxed only at 20 per cent in retirement. This is a quirk of the system that critics want removed. The government may change the system to a flat rate of pensions relief, which every saver receives regardless of income. It is expected to be somewhere between 25 per cent and 33 per cent.
“Moving to a flat rate could be fairer, but would create big losses for higher earners. You would only have to be earning £50,000 a year to make a big loss,” says Mr Webb.
Pensions annual allowance
There is a cap on how much you can save into a pension and claim tax relief on. It varies by income level, but for many people it is £40,000. Those earning more than £150,000 have their relief tapered to £10,000 for people on salaries of £210,000 or more.
The limit was introduced in 2006 at £215,000 and has been cut repeatedly. Mr Webb says it is likely to be trimmed again in November. Ms Griffin agrees: “Pensions are often the go-to source for funding and it’s an easy target. The simplest thing he could do is to reduce the annual allowance.”
Tax-free lump sums
At the moment you can take a 25 per cent lump sum from your pension pot at retirement age, set at 55 for now. “The lump sum is another attractive target for the chancellor. Although removal would be too extreme, there’s plenty of scope for limitation,” says Jim Stevenson, the pensions manager at Ascot Lloyd, a financial adviser.