With under two weeks to go until the Budget on 24th March 2010, the pundits are out in force with their predictions.
This is going to be a highly political Budget, taking place only a few weeks before a General Election, but also at a time when the UK economy remains in a very fragile state.
Here are our personal finance predictions for the Budget.
1 – Capital Gains Tax
The gap between capital gains tax at 18% and the new highest rate of income tax at 50% is too wide, opening up the risk that taxpayers will look for ways to avoid income tax by shifting their strategies to capital gains. We would not be surprised to see CGT increased to 25% or 30% in this Budget.
2 – Inheritance tax
With politics so focused on class in recent months, there is a gulf between the parties when it comes to inheritance tax. The Conservatives still plan to increase the nil rate band to £1,000,000, but Labour are more likely to tighten this tax. The nil rate band has already been frozen for 2010/11, so investment growth will result in higher IHT bills for many estates.
3 – Pension commencement lump sum
It is fair to say that many investors have been panicking in recent weeks amidst speculation that the Budget will attack the tax-free cash benefits available from pension plans. This is particularly true for investors who are entitled to greater than 25% of their fund or very large tax-free cash payments.
There is a rumour in pension circles before just about every Budget that the Pension Commencement Lump Sum will be targeted. We hope that it is simply a rumour with no foundation once again this time.
4 – Simplifying pension tax relief
The anti-forestalling measures introduced last April, and updated twice since, are very complex and probably failing in their original goal to prevent higher earners from getting excessive amounts of higher rate income tax relief on their pension contributions. We hope to see these measures radically simplified in the Budget, perhaps with a reduction in the annual allowance on tax relieved pension contributions to a more sensible level such as £50,000.
5 – VAT on hold at 17.5%
The UK continues to have one of the lowest rate of VAT in the European Union, but we do not think the Chancellor will be announcing an increase to 20% as was previously predicted. Increasing VAT now would be a vote loser and would also push at price inflation, making the current spike look unmanageable and possibly influencing monetary policy at a time when the economy cannot afford it.
6 – Something for savers
With the Budget so close to a General Election, it would be remiss of the Chancellor not to offer something to savers. This group of voters have been suffering from historically low interest rates for over a year now, and with the recent spike in price inflation have seen the real value of their savings eroded. This gift to savers might take the form of a higher cash ISA allowance.
Whilst it would be foolish to make important financial decisions today based on any Budget predictions, it is important to be aware of the possibilities and understand how they might impact upon your financial planning.
There is every chance that any Budget changes will be changed again or reversed entirely by a new Government. It will also be interesting to see just how detailed the subsequent Finance Bill looks after the Budget, with such a short period of time to get this through Parliament before it is dissolved.
