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Allowances in focus

More tax changes possible in already busy year

Peter YoungThe Chancellor’s Budget speech on Wednesday will represent a fourth opportunity in the space of a year to tinker with the Government’s tax and spending plans.

With the state of the country’s – and world’s – finances in an uncertain position, it will not be a surprise to see yet more changes in taxation policy introduced. Added to this is the politics around the EU referendum which all adds up to a very tricky position for the Chancellor to navigate himself through.

We have already seen a huge number of tax changes announced which take effect from April including general rises in tax on company dividends, a 3% LBTT supplementary charge on second and buy-to-let homes, and a restriction in the lifetime allowance for pensions from 1.25 million to £1m, and so many would be forgiven for hoping to see a quiet Budget this time around.

However, Chancellors generally do not think that way. So what might we expect?

On the positive side, we might see the Chancellor announcing a route map on when and how he will raise the personal allowance towards the £12,500 limit. This was promised by the end of this Parliament and is a starting point for the higher rate tax band to apply for income over £50,000. It may be that we will see these policy aspirations reached before rather than at the end of this Parliament in 2020.

JC side panel for 3 articlesWith the Chancellor stepping back from restrictions in higher rate tax relief on pension contributions we could still some further changes in this field. The current generous three year carry forward of unused pensions annual allowance could be restricted. The annual allowance itself has been reduced significantly over a number of recent Budgets and we could see the limit drop from £40,000 even for those not earning more than £150,000 per year.

The 10% Entrepreneurs’ Relief capital gains tax rate has been much used since its creation in 2008 and over this time has become more generous with the lifetime limit increased from £1m to £10m. Might we see some further restrictions in the relief to make this a less expensive cost to the Treasury?

Whilst the Government has restricted its room for manoeuvre on rate changes for Income Tax/VAT and National Insurance, we have seen sidesteps around the tax lock through the introduction of the Apprenticeship Levy for larger businesses with payrolls over £3m per annum applying from April 2017 and of course the new dividend tax changes commencing this April. We might see further announcements including a tightening on National Insurance Contributions on salary sacrifice arrangements which has long concerned the Government.

Finally, whilst the Chancellor will be setting fiscal policy for the UK, we in Scotland will need to consider the new powers being afforded to Holyrood in terms of tax rates and bands which the Scottish Government will be able to set going forward.

All eyes will be focused on the Scottish Finance Secretary’s own Budget announcement later this year when we might see a divergence from the rest of the UK applying from April 2017.

Peter Young is Head of Private Client Tax at Johnston Carmichael

 

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