Although Sajid Javid’s unexpected departure as Chancellor of the Exchequer last month threw the timing of the upcoming Budget into doubt, his replacement Rishi Sunak has since confirmed the March 11 statement will go ahead as planned. So what can we expect next week?
Given the current government’s spending commitments, it seems inevitable that some tax increases will be imposed in the Budget. Boris Johnson has already promised extra investment in the NHS, the police as well as major transport infrastructure projects such as HS2.
Javid has recently revealed some of the changes he was planning to make had he kept his position: most notably, he says he intended to cut the basic rate of income tax from its current 20% to 18% – and eventually to just 15%.
But whether Sunak will make the decision to press ahead with these proposals remains to be seen. The current basic rate of tax has been unchanged since 2008, when it was cut by Labour from 22% – at the same time as the 10% “starting rate” was scrapped. At the end of last year, the Conservatives shelved plans to reduce tax rates for higher earners: instead, prime minister Boris Johnson said, the government would prioritise individuals who need “help with the cost of living”.
It has been suggested that this might be achieved by raising the threshold at which National Insurance is payable – a move that could well be implemented by Sunak as an alternative to cutting income tax.
One change that appears more likely to be introduced, if reports in the press in recent days are to be believed, is the scrapping of entrepreneurs’ relief – a tax break on business sales which is estimated to cost the exchequer almost £3 billion a year. Under the current system, business owners who sell up pay capital gains tax of just 10% on lifetime gains of up to £10 million, as opposed to the 20% paid by higher-rate taxpayers.
Pensions tax relief
The tax relief available to higher earners when they put money into their pension has also come under renewed scrutiny, and there has been speculation that the government could be about to make significant changes to the current system. At present, savers are entitled to tax relief at their marginal income tax rate when they make pension contributions – this means that, while it would cost a basic-rate (20%) taxpayer £80 of their take-home pay to buy £100 of pension, for a higher-rate taxpayer at 40% the same amount of pension would cost just £60.
While tax relief undoubtedly plays an important role in incentivising pension contributions, the fact that higher earners benefit to a greater degree means that the system has often been seen as ripe for reform by politicians looking to increase tax revenues.
If Sunak does decide to limit pension tax relief to 20%, it is possible that higher-rate taxpayers could have a short window – until the start of the new tax year on April 6 – to boost their 2019-20 contributions and thereby benefit from higher-rate relief before the new system comes into effect.
There have also been rumours that the way inheritance tax is levied could be about to change: last autumn, Javid indicated he was open to the idea of introducing reforms and perhaps even to cutting the rate from 40% to as low as 10%. Again, however, it is not yet clear what view Javid’s successor is likely to take, although it has been suggested that Sunak could target the likes of Agricultural Relief and Business Property Relief, both of which can be used to reduce potential inheritance tax bills.
Meanwhile, Javid’s reported plans to introduce a “mansion tax” on high-value homes appear to have been vetoed by the prime minister – but Sunak may decide to introduce new incentives for first-time property buyers as well as key workers looking to move up the housing ladder.