It is usually hard to feel sorry for a politician, but Philip Hammond has a difficult task ahead on Monday when he will deliver the Autumn Budget, writes Nick Edgley, Personal Tax Manager at Ensors.
He needs to raise funds to pay for the ‘end of austerity’, plus the extra £20 billion promised for the NHS and sort out the Universal Credit debacle. At the same time, he must try and keep the electorate sweet in case we are forced into another general election due to the Brexit negotiations.
As a result, it is highly unlikely that there will be any tax giveaways for individuals and families, and more than possible that there will be some nasty stings, disguised as making tax ‘fairer’ for all.
So how will Hammond raise the extra cash without an obviously unacceptable cost for the voters?
First things first: The Chancellor can usually rely on increasing the duty on non-essentials such as alcohol and cigarettes, and there will probably be a couple of extra pence on each of those.
We already know that there will be no increase in fuel duty because this was announced by Theresa May a few weeks ago. In theory this is a tax reduction, but of course the Treasury is already receiving extra VAT on sales of fuel due to the general rise in prices.
In early 2016 the price of diesel dropped to less than £1 per litre, but it has since increased sharply to its current price of more than £1.30. Fuel duty is charged at a fixed rate of 57.95 pence per litre, which has been frozen since 2012, but VAT is charged at 20 per cent on the wholesale price plus the duty.
Income Tax is by far the biggest contributor towards the Exchequer, so any changes to this will have a big impact. Hammond may therefore decide to reverse the promised increase in the tax-free personal allowance.
This is currently £11,850 and was expected to go up to £12,500 from April 2019. Also, the threshold at which the tax rate rises from 20 per cent to 40 per cent was set to increase to £50,000 from its current level of £46,350. These may both be put on hold for the moment.
The promised abolition of class 2 National Insurance contributions, paid by the self-employed, has already been cancelled.
There are also strong rumours that there will be further restrictions on tax relief for pension contributions. Due to the way that the tax relief works, it costs a basic rate taxpayer £80 to put £100 into their pension fund, whereas for a higher rate taxpayer it only costs £60, and for the very highest earners the cost is only £55.
There has long been talk of a flat rate of tax relief on pension contributions, which would help to reduce this unfairness, but that would be very complex to put in place, and the Treasury has other, more pressing, tasks to worry about just at the moment.
Over the last few years more employees have been paying into pensions under the workplace pensions requirements which were imposed by Government, so it is unlikely that tax relief will be removed entirely.
But there may be a further reduction to the cap on contributions, which would be considerably easier to implement and would not affect most taxpayers.
Currently, the maximum payment into a pension is £40,000 per year (reduced to a minimum of £10,000 for higher earners), and under some circumstances more relief can be claimed where the maximum was not paid in earlier years. It is also possible that the facility to use up this unused relief will be withdrawn.
Finally, it is very unusual to have a Budget on Monday. It is rumoured that Hammond had pencilled in Wednesday 31st for the speech, only to be told that as it is Hallowe’en there might be unwelcome headlines the next day. Even so, this might be a spine-chillingly horrible event!
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