Chancellor to pinpoint tax freezes
Osborne Budget: likely to be a statement of intent
Back in March when George Osborne delivered his final pre-election Budget the key question was whether voters would reward him for the up-turn in the UK economy. The answer, at least south of the Border, was quite clear as the Conservatives secured a surprising majority victory on 7 May.
Despite the Nationalist’s near sweep of Scotland (which was far more devastating for Labour and ultimately neutral for the Tories who maintained their single MP), Mr Osborne will undoubtedly be on the front foot when he announces a summer Budget next Wednesday. Delivering this statement as the Chancellor of a majority Conservative Government is a scenario few would have predicted just a few months back.
I expect he will use the occasion to implement changes detailed in his party’s manifesto with the headline measures likely to include some details on the seemingly contradictory intentions of cutting £12 billion in welfare spending while also introducing “tax lock” legislation to guarantee no increase in income tax, national insurance (NIC) and VAT rates for five years.
While his tax lock cap may also not extend to class 3 NIC, with the abolition of class 2 contributions it is possible that the class 4 rate will rise to 12% to align with class 1 paid by employees.
By limiting his taxation options in these areas the Chancellor will have to look at other means of revenue raising. There is, for example, speculation that capital gains rates will rise given they are significantly below top income tax rates (18/28% compared to 40/45%).
We could also see reduced tax relief on pension contributions for those paying tax at 45% from £40K annually to £10K, a restriction which could be put in place immediately but would be more likely to apply from 6 April 2016.
We will likely see a further tightening up of avoidance rules with an increase in the remittance charge for non-domiciled residents and a possible reduction on the ability to inherit non-dom status. We may also see a widening of criminal offences such as the introduction of a strict liability criminal offence for failing to declare offshore income or gains.
In terms of tax reduction measures, we can expect an increase in the personal allowance to £12,500 and a higher rate threshold of £50,000. More details on raising the inheritance tax (IHT) threshold to £1m, a popular proposal amongst the Tory faithful, also has potential to be included in Wednesday’s statement.
This could come in the form of an additional £175K nil-rate band that applies only to the value of the family home. When current nil-rate bands are added together, a surviving spouse would essentially have an IHT-free amount of £1m but with only £350k able to go against the family home.
We’ll know the finer details by next Wednesday but overall you can expect this statement to set the tone of how the Conservatives plan to govern over the next five years: headline grabbing tax freezes offset by cuts in welfare spending and other, more subtle tax rises as they continue on the march of austerity in their quest to balance the books.
Susie Walker is head of tax at chartered accountants and business advisers Johnston Carmichael