Budget 2020: Analysis
Higher earners escaped tax rises, but maybe not next time
Chancellor’s light touch on tax will please the masses and leave high earners breathing a sigh of relief, says PETER YOUNG
Few will have seen changes to their personal taxation position following Chancellor Rishi Sunak’s first budget, but higher earners will be breathing a sigh of relief.
His light touch is perhaps unsurprising, given the Government’s pledge not to increase rates of income tax, national insurance and VAT in this Parliamentary term.
In the run up to the Budget, however, there had been persistent speculation that a number of reliefs were likely to be cut or even scrapped. Among the measures that had been tipped were the possible abolition of Entrepreneurs’ Relief, a major overhaul of the inheritance tax code, and a restriction of higher rate tax relief on pension contributions.
In the end, the Chancellor did confirm restrictions in Entrepreneurs’ Relief from a lifetime limit of £10 million to £1 million with immediate effect, satisfying the Conservative Party’s 2019 manifesto pledge to review and reform the relief. This could be seen like a sensible middle ground and will help to maintain the spirit of the incentive.
Whilst not being a big revenue raiser for Government coffers, inheritance tax legislation has been thought by many to be overdue for reform.
Reports by the Office of Tax Simplification in July 2019 and the snappily titled All Parliamentary Group for Inheritance and Intergenerational Fairness, in January 2020, between them proposed some very significant changes.
These included the abolition of many reliefs including Business Property Relief, Agricultural Property Relief and potentially Exempt Transfers in exchange for a simpler set of rules and a potentially lower headline rate of IHT. No changes were announced and perhaps may be considered in future Budgets. Change is likely and this gives time to plan ahead.
Pensions tax relief and particularly higher rate relief for high earners has continued to be a matter for debate given its cost to the Exchequer and perceived unfairness in benefiting those who could afford to invest more into pensions.
The Government has left the pensions tax relief framework largely untouched with the exception of important changes in tapering of the annual allowance which limited tax relief on individuals with incomes above £150,000.
With effect from April 2020, the tapering will apply to those with incomes above £240,000 but with a slight sting in the tail by limiting tax relief on pension contributions to £4,000 per year for those with incomes above £312,000.
The Government pre-announced that there would be no changes in next year’s personal allowance (£12,500) or basic and higher rate bands. This could be seen as tax by stealth as people’s incomes increase. The Scottish Government will no doubt be relieved that there were no changes in UK allowances and rate bands given that they needed to publish their Budget prior to Westminster.
There continues to be a difference in tax rates between Scotland and the rest of the UK with those on lower incomes benefiting marginally north of the border. While the Westminster and Holyrood Budget announcements have led to no further widening of the gap, they continue to mark the difference between the two regimes.
Peter Young is Tax Partner at Johnston Carmichael