Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The weekend before a Budget is always filled with rumours about what the Chancellor may or may not include, and this past weekend included a bumper crop.
One potential change that was already known about, but that gathered pace in the Sunday press, is an increase to corporation tax. The current 19% rate could rise to as high as 25% with the increase phased over the next four years.
Rishi Sunak certainly did nothing to dampen the rumours in his interview rounds. In relation to the huge (borrowed) cost of the Government’s Covid-19 stimulus measures, he explained to Sky News that he wants to “level with people about that, about the problem that that causes and the challenges that it presents us with and be honest about our plan to address those".
So, we can expect lots of warnings about difficult decisions to come and ‘levelling’ with the public - but that doesn’t mean the rumours on Corporation Tax will be confirmed, at least not in full.
A rise in Corporation Tax may arrive on Wednesday but the lessons from Budgets past is that the reality tends not to be as bad as the rumour when it comes to tax rises. The trailed 6 percentage point hike would take the UK’s rate to 25% in 2025 - still below current rates in France, Germany and the US but way above the EU average of just above 20% and ahead of the OECD average of almost 23%.
With the UK still finding its place in the world after Brexit, and the undoubted need for a rapid recovery from the pandemic, the Government will shy away from anything seen as making the UK an uncompetitive place to do business. That indicates that the Chancellor could increase Corporation Tax but by less than the reports suggest.
The brand new rumours to emerge this weekend surround personal taxes, and specifically the thresholds that govern income tax and pensions.
A three-year freeze on rises to the thresholds for income tax is apparently being considered. That, of course, would mean that more people would slip into higher bands for income tax in the coming years as wages rise but the thresholds for 20%, 40% and 45% tax remained frozen.
It has revived an old attack on the Chancellor from critics of the plan - that he will impose ‘stealth’ taxes on the British public. This of course is the phrase thrown at Gordon Brown when, following New Labour’s election in 1997 on a manifesto pledge to not increase the headline rates of tax, the then Chancellor went ahead and removed the ability of pension funds to reclaim tax paid on dividends. It was a technical change that few people understood - hence its stealthiness - but it netted the Treasury £5.4bn from pension funds.
Rishi Sunak’s proposed tax threshold freeze is less obscure than that but would, like Gordon before him, allow the Chancellor to plead that he has not technically broken the Conservatives‘ election promise to not raise the rate of income tax. It would not go unnoticed, however, and would not be without some political cost to the Government, not least because it would include taking more from lower earning workers.
That fact alone could stay the Chancellor’s hand this time and a less dramatic revenue-raising measure - or none at all - could arrive.
One rumour that looks more certain concerns the Lifetime Allowance for pensions savings. That’s the total amount you can pay into a pension and still get tax relief, currently set at £1,073,100, which the Chancellor is reportedly set to freeze for the rest of this parliament.
The Lifetime Allowance affects both those in defined contributions pensions - where money is saved by individuals and their employers and invested to build a fund for retirement - and defined benefit schemes - where retirement income is worked out as a percentage of someone’s working salary.
You can read more about how the Lifetime Allowance works here.
Of all the pre-Budget rumours doing the rounds this would appear the most likely. It is a more modest change when compared to big changes on Corporation or Income Tax, recouping an estimated £250m for the Treasury, and it can more legitimately be said to be targeted at the wealthy.
It would. However, be a stealth tax rise. We’ll find out on Wednesday how far the Chancellor will go in embracing his inner Gordon.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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