“Fiscal drag is a term that describes the increase in the tax burden that is caused by incomes and asset values rising faster than tax allowances. With inflation and wage inflation running at higher levels in the UK, the impact of fiscal drag is going to continue to have a significant impact on individuals.
This freeze allows governments to keep promises not to raise the headline rate of tax. In the meantime, more people begin to pay higher rates of tax as their incomes rise – but not necessarily in real terms.”
“Increasing the rate of tax on dividends may appear to be targeted at wealthy investors, particularly as more modest savers may have their shares held in tax-free ISAs, but it will have a serious impact on entrepreneurs and small businesses. Shouldn’t we be encouraging more innovation and entrepreneurial spirit in the UK?
While it risks further complicating the UK tax system, differentiating the rates between investors and those taking dividends from their personal companies may help reduce the financial impact on owner managed businesses.”
“People paying the higher rates of tax (40 or 45%) and making personal contributions will see the effective cost of those contributions increase. At the moment, the Government gives full tax relief on contributions but it is split between the basic rate being added directly to the pension scheme and a tax refund for the taxpayer themselves.
If the taxpayer only pays basic rate tax, when they retire the change could be said to be neutral- basic rate relief on the way in, and basic rate tax on the way out. But if the taxpayer has other retirement income it could mean that they get only basic rate relief on the way in, and pay higher rates on the way out.
The increased up-front cost and the lack of symmetry on the way out could make personal pension contributions much less attractive unless there is more radical reform on pension taxes.”
“It is easy to overlook that employer contributions form part of an overall reward package. If there is only going to be basic rate relief on pension contributions, then we could see tax bills arising to employees to collect higher rates of tax on the employer contributions. These could be significant, especially for those in final salary schemes. If there is an employee contribution towards the scheme, then the individual would pay higher rates of tax on that deduction plus the employer contributions.
We have previously seen the response of senior medical professionals to being taxed on pension benefit accruals. This change would have a much broader impact and could easily affect junior doctors as they move through the pay scale. Perpetuating full tax relief for employer contributions would mean some people could get tax-free benefits but not others, putting those unable to use salary sacrifice arrangements at a significant disadvantage- including all self-employed.”
“For many people, their home is their most valuable asset. The Government’s Residence Nil Rate Band (RNRB) is an extra amount that can be passed on after someone dies without any inheritance tax being payable. It means that if certain conditions are met, those who are left a gross estate worth less than £2 million will qualify for RNRB of £175,000. However this £175,000 threshold is already fixed until 2026 – despite house valuations increasing year on year.
There are challenges for all of us ahead – Government debt is close to £2.4tn and to truly tackle this, tax increases look inevitable as the Government seeks to rebalance the books. If the Chancellor decides to keep the threshold fixed for inheritance tax – rather than rise it in line with inflation – more people are going to find themselves caught in the inheritance tax trap. It will provide all the more reason for individuals to seek professional advice as early as possible, and to maximise other tax reliefs and planning.”
“The OBR estimates that for the current tax year, Capital Gains Tax (CGT) accounts for £15bn of overall tax receipts – but this only represents 1.5% of all UK tax receipts. This explains why the government would have to make a significant change to capital gains tax for it to result in a substantial and meaningful contribution to the Treasury.
If the new Chancellor decides to halve the £12,300 tax-free allowance for capital gains to £6,150, tens of thousands will find themselves paying the tax for the first time. This will be unwelcome news for landlords, second home owners and those looking to sell their property as capital gains tax is applied at a much higher rate for residential property sales.
If this happens on Thursday, expect to see a decline in the number of disposals – people will hold off from selling their assets during unfavourable conditions. Or, if there is a delayed introduction for the new threshold, look out for a quick spike in sales as individuals and families try to beat the new implementation date.”