But with his hands tied by a Manifesto Commitment not to increase income tax, National Insurance or VAT, the Chancellor may have future plans to make changes in these areas, while also seeking to boost the green economy and deliver intergenerational fairness. While we won’t see any immediate changes on 23 March tax administration day, we may gain new insights into what might be under consideration for the future. In many areas, those potentially affected could benefit from seeking financial advice.”
Collecting the right taxes – a more digital approach
“The Government has indicated its desire to make the administration of taxes more digital. The Office of Tax Simplification (OTS) is currently reviewing the role third parties could play in supplying data direct to HMRC to pre-populate tax returns and ‘improve the taxpayer experience’.* Their call for evidence is asking both consumers and institutions for their views. This could see pension schemes and providers sending HMRC data on pension contributions so that higher rate taxpayers receive higher rate tax relief automatically rather than some ** having to claim it. Another possibility is to ask investment companies and platforms to send HMRC data of gains made when investments are sold, but this would create many technical and practical issues due to the complexity of Capital Gains Tax, with consumers holding assets on multiple platforms and/or with different investment firms and moving between these.”
Capital Gains Tax
“Despite no changes in the Budget, there is ongoing speculation that the Chancellor may look at wealth taxes to return the nation’s finances to a sustainable basis longer term. Last year, he commissioned a review from the OTS, which suggested a range of wide-reaching possible changes.
“It’s widely viewed that increases in wealth are taxed at lower rates than income, so reform of CGT could focus on aligning CGT rates more closely to those of income tax. The other main option, as highlighted in the OTS paper, would be to reduce the annual CGT exemption which is currently £12,300.
“However, reform of CGT would present some complex trade-offs between different groups affected and the Chancellor may decide to formally consult on this. While it may seem justifiable to increase the tax take of those realising large gains on assets outside of pensions and ISAs, or on the sale of second homes, the Chancellor might wish to protect small business entrepreneurs who sell their business, perhaps to fund their retirement. This could be through a more generous form of the existing business asset disposal relief.”
Inheritance Tax and Pensions
“As with CGT, the Chancellor might be looking to increase rates of, or reduce exemptions from, Inheritance Tax (IHT). The OTS has published two reports making recommendations aimed at simplifying IHT including around gifts, while an All Parliamentary Group has also published a paper with more radical proposals calling for a complete overhaul of IHT. Going a step further, the Chancellor could even look at a combined overhaul of CGT and IHT.
“One specific, which some have speculated on, is bringing death benefits from pensions into scope of IHT. This would be at the extreme end of the spectrum of options, with a multitude of knock-on consequences going against the pension policy objectives of encouraging people to save adequately for retirement, with the freedom to use their accumulated funds flexibly throughout retirement.
“Death benefits from pensions are currently typically paid at the discretion of trustees or scheme administrators and are free of IHT. When saving in a pension, the vast majority of people are doing so to provide a retirement income, rather than to pass on an inheritance. Bringing accumulated pension funds or 'death benefits' into an individual's taxable estate on death would seem particularly harsh and unjustified. We need to encourage people to save more into pensions so creating a possible tax liability for ‘good behaviour’ would be highly counterproductive.
“The pension freedoms introduced around 6 years ago, give people more options on how to use their defined contribution pension pot to generate a flexible income through retirement. An increasing number are keeping their fund invested and 'drawing down' a flexible income with any funds remaining on death passed to a beneficiary. If death benefits here were brought within IHT, it would encourage individuals to avoid leaving money in their fund and instead to take more income sooner, increasing the risk of them running out of money while still alive and well. This would undermine the whole concept of pension freedoms.”
Aligning income tax and National Insurance for employees and self-employed
“The chancellor has repeatedly reminded us that during the pandemic he has provided support to both employees (through the Coronavirus job retention scheme) and to the self-employed (via the self-employed income support scheme). He has hinted that equal support may justify equal income tax and NI. Of course, it’s an over-simplification to say either pandemic support or state benefits are equal – for example the self-employed are not entitled to statutory sick pay or pay during parental leave. But now might be an opportune time to start exploring the many complexities of aligning income tax and NI for employees and the self-employed.”
References
* https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/955498/Third_Party_Data_Reporting_CfE_.pdf
** Individuals in ‘Relief at Source’ pension schemes who pay tax at higher than basic rate must claim relief above the basic rate from HMRC
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