George Osborne will present his sixth budget on Wednesday with little room to make any mistakes. The Chancellor’s Budget has already been overshadowed by speculation around pension tax relief and the EU referendum. At EQ, we believe he should focus on economic stability and avoid further over-complication around pensions.
Pensions – leave them alone
Back in 2006, ‘pension simplification’ introduced two concepts: the Annual Allowance and the Lifetime Allowance. In the ensuing ten years, we have seen seven changes to each of these allowance, fourteen in total.
Over the same period, you can add into the mix; Anti-forestalling, the Special Annual Allowance, Auto-enrolment, the Money Purchase Annual Allowance, Pension Freedoms, and Transitional Pension Input periods. From April this year, high earners will have to work out their threshold income and adjusted income before they know how much they can pay into a pension.
A period of certainty for pension savers is long overdue.
60% tax trap – remove tapering
If you earn over £100,000, your Personal Allowance is withdrawn using a tapering mechanism. The result is a tax rate of 60% on income between £100,000 and £121,200. Many people currently avoid this additional tax by using salary sacrifice to make pension contributions.
To be fair, a tax system must be clear – a hidden tax rate of 60% implemented via a complex taper system goes against this principle. In the interest of simplicity, we urge the Chancellor to scrap this overly complicated system and reduce the point at which the 45% rate is payable in order to recoup any lost revenue.
Income tax – increase higher rate threshold
Between 2009/10 and 2013/14 the point at which higher rate tax became payable reduced from £43,875 to £41,865. From April this year the 40% tax rate won’t kick in until income reaches £43,000 but several years of ‘fiscal drag’ has seen the percentage of 40% taxpayers increase from 11.91% to 15.66% – an extra 780,000 people are now paying the higher rate.
The government’s ambition to increase the higher rate tax threshold to £50,000 is welcome and we urge the Chancellor to take steps towards this goal.
Social investment tax relief (SITR) – level playing field required
The Government has been vocal in its plans to bring social investing into the mainstream. What we need now is for SITR funds to be treated in a similar vein as Enterprise Investment Schemes (EIS). Currently for SITR funds, any interest received is taxable – this needs to be changed. The ability to claim loss relief also needs to be allowed so SITR has a chance to realise its potential.
News on the long overdue increase from the existing limit of less than £300,000 over a three-year period to £15m would be most welcome.
‘Help to Save’ Scheme – a welcome incentive
Details of this new scheme have already been unveiled by the Prime Minister and we welcome the initiative. Almost half of UK adults have savings of less than £500 and this incentive should help families to build up a safety net.
Under the scheme, those are in work and receiving tax credits or universal credit can save up to can save up to £50 a month into the scheme, and will receive a 50 per cent bonus after two years, worth up to £600.