Steven Cameron, Pensions Director at Aegon considers some of the measures Rishi Sunak is rumoured to be considering and the implications for savers and investors. This includes pensions tax relief, wealth taxes, income tax and National insurance, state pensions and social care.
Steven Cameron, Pensions Director at Aegon comments: “The Chancellor faces the unenviable task of how to begin recouping the many billions he is spending supporting individuals and businesses through the pandemic and he may use the Spending Review to signal the start of a lengthy period of pandemic payback. The scale of the current funding gap means it’s not a question of whether, but of how, from whom and when Rishi plans to arrange that payback. Just like the virus itself, everyone is likely to be affected but in different ways. There’s no easy remedy, raising the prospects of a range of measures including adjustments to tax rates, reliefs and allowances, which could have huge and varied implications across generations and earnings levels. All of this is likely to be coupled with public spending restraint, while avoiding the risks a full blown return to austerity would have to economic recovery.
“The tax system can have a big impact on long term saving and investment behaviour and can go a long way to nudging individuals into actions the Government wants to encourage. So it’s vital any changes to tax reliefs and incentives don’t discourage saving for retirement or for ‘rainy day’ emergencies - if anything these should be encouraged to provide investments in the economy. With many seeing change as inevitable, for those lucky enough to have any extra funds, now may be the time to make as much use as they can of incentives they may lose by topping up pension contributions or making full use of ISA allowances.”
Pensions – balancing the ‘cost’ of tax relief with the benefit of long term investment
“For years, there has been speculation that different Chancellors might boost income tax receipts by cutting tax relief on pension contributions, particularly for higher and additional rate taxpayers. The current rumour is Rishi is considering a move to a flat rate of relief at 25%. While this would reduce the incentives for higher rate tax payers, it would actually improve the boost basic rate taxpayers receive.
“But as previous Chancellors have discovered, such changes are highly complex to implement, particularly for defined benefit schemes or for those using ‘salary sacrifice’ to pay their pension contributions. This means individuals and pension schemes would need sufficient time to adapt.
“The Government is also increasingly focussing on pension funds as a source of investment to support economic recovery, including in infrastructure and the ‘green revolution’. Simply making pensions less attractive for higher rate taxpayers would clash with this, but a balanced approach that offers greater incentives to basic rate taxpayers to put more into their pension could not only boost pension funds but also help more people save adequately for retirement.”
Capital Gains Tax – more tax on wealth?
“Very recently, the Office of Tax Simplification, responding to a request from Rishi Sunak, set out proposals for a sharp increase in the rates of Capital Gains Tax (CGT) or a harsh cut in the annual exemption. These changes would affect a wide variety of individuals including those holding significant investments outside of tax favoured wrappers such as pensions and ISAs, owners of second properties and business owners who plan to sell their businesses to fund their retirement.
“Many potentially affected would not consider themselves ‘wealthy’, but reforms of wealth taxes including CGT and inheritance tax would impact far fewer people than an increase in income tax, so can’t be ruled out. Again, those concerned might look to make full use of pension and ISA allowances.”
Income tax and National Insurance
“While a blanket increase to the headline rate of income tax or National Insurance is unlikely in the short term, it can’t be ruled out longer term. In the meantime, the Chancellor might consider other more targeted changes such as levying National Insurance on earned income after state pension age. It has also been suggested that in return for the support received by the self-employed, their income tax and NI might be brought more in line with that of employees.”
State Pensions – the multi-billion pound benefit bill
“There has been heated debate on the future of the state pension triple lock, which grants annual increases at the highest of price inflation, earnings growth or 2.5% each year. The Government appears to have committed to keep this at least until next April, upholding its pre-Election Manifesto commitment. But with earnings growth likely to be highly volatile for the foreseeable future, and with the prospect of a public sector pay freeze, this could prove just too costly in future years, with every 1% increase adding £1bn to the ‘pay as you go’ bill met by earners below state pension age in every future year.”
Social Care Funding – too big to ignore
“The devastating impact the pandemic has had on our most elderly has shown just how valuable but stretched our care system is, making it even more urgent that the Government delivers on promised reforms to social care funding for our aging population. We may see additional funds allocated to the care sector in the Spending Review but this is unlikely to be more than a short term sticking plaster. Previous suggestions to create sustainable funding included an increase in income tax or National Insurance, earmarked for social care, and perhaps just for the over 40s. But the Chancellor will now need to undertake a tricky balancing act to assess any such changes against whatever other plans he may have in store.”
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