Budget 2020: we round up predictions for pensions, investment and tax

With just days to go until chancellor Rishi Sunak delivers his first Budget, we run through what could be in store for pensions, investment and tax.

It is that time again, and with just days to go until chancellor Rishi Sunak delivers his first Budget the rumour-mill is in overdrive.

Below we round up predictions for the world of personal finance, looking at possible changes to pensions, investments and tax.

Pensions

Once again speculation has been mounting that this could finally be the Budget when pension tax relief is reformed. However, such rumours first surfaced under ex-chancellor Sajid Javid and have somewhat cooled since Rishi Sunak took over the mantle of chancellor.

Various experts, including Steven Cameron, pensions director at Aegon, caution that changing pension tax relief would be challenging to implement. Cameron says: “While there are benefits in flat rate relief, when the government considered such changes back in 2015, it found there are many complexities to consider, and unless these are thought through and solved, changes could do more harm than good.

“The three biggest areas of complexity relate to the tax treatment of employer contributions, how to avoid a ‘salary sacrifice loophole’ and how to apply such an approach to defined benefit schemes.”

What is widely viewed as more likely to occur in the Budget is a revamp or removal of the tapered annual allowance.

Under the taper system introduced in the 2016/17 tax year, high earners with an income above £150,000 are severely restricted in regard to how much they can save into their pensions, as their £40,000 annual allowance is reduced by £1 for every £2 of income above £150,000, with a maximum reduction of £30,000. Therefore, anyone earning more than £210,000 can pay only £10,000 into a pension each year.

These restrictions, combined with the pension lifetime allowance, which currently stands at £1.055 million, have led to some high earners – most notably senior NHS doctors – opting to retire early or reduce their hours. Those who breach the lifetime allowance are heavily penalised, with punitive tax charges of 55% due on money above the limit if it is taken as a lump sum, or 25% if it is taken as income.

Rather than the tapered annual allowance being removed altogether, there are rumours that the salary level at which the taper kicks in will be raised. But Tom Selby, senior analyst at AJ Bell, argues this will be “a half-baked solution which fails to address the core problem – namely that senior doctors are unsure whether they will be clobbered by tax charges if they take on extra shifts.”

Another pension area that’s ripe for reform, according to Claire Trott, head of retirement strategy at St James’s Place, is the money purchase annual allowance (MPAA), which has introduced a great deal of complexity. The allowance, which is set at £4,000 per year, is the amount savers can pay into a pension each tax year (and benefit from tax relief) once they have started taking a pension.

She adds: “What is needed is greater simplification, and with the current regime this would mean the removal of the tapered annual allowance and the MPAA, so everyone knows what they can contribute at the start of a tax year. It is only fair that tax charges should be clear and easy to understand so the general public can make informed decisions.”

Another area that could be in line for reform, according to Les Cameron, Prudential UK’s tax and pensions expert, is the current flexible rules around passing on wealth.

With defined contribution pension schemes the remaining pension pot can be passed to anyone on the pension holder’s death – in contrast to both final salary or defined benefit (DB) pensions (which may provide a reduced spouse pension but cannot be passed on) and annuities (which similarly die with the annuitant). This attraction has been a driver behind the increase in individuals transferring out of their DB pensions and the decline in annuity purchase.

Cameron says: “Pensions’ favourable tax treatment was based on providing for yourself and your dependants, not to pass on wealth. Could the government turn its eye to taxing pension death benefits that are not paid to dependants?”  However, he cautions: “While there are a number of areas that are ripe for change, consultation is more likely to be announced at this Budget with any changes to follow in the autumn.”

Investment

There’s been barely any mention in the rumour mill in terms of potential changes to the investment landscape. The Isa allowance, which stands at £20,000 a year, is expected to remain untouched.

The old process was for the Isa allowance to rise with inflation every year, but this has not happened since it was raised to £20,000 in April 2017. The allowance is the most generous it has ever been, and changes to increase it further are not expected.

Additional changes to the dividend tax allowance, which was in 2017 unexpectedly cut to £2,000, are not expected.

Moreover, no changes are expected for venture capital trusts (VCTs) and enterprise investment schemes (EIS), which have been meddled with over the years.

There may, though, be bad news for business owners amid concerns that entrepreneur’s relief will be cut. The relief currently reduces capital gains tax payable on the sale or disposal of a business from 20% to 10% and is capped at £10 million.

Lucienne Parry, a partner at Moore, the accountancy firm, explains: “For some entrepreneurs the tax savings at stake are very significant, making it well worth pushing for an early completion of a deal. For many, the gains from their business sales will form a large part of their retirement income – an increase in tax here is going to impact their quality of life in retirement, as the amount that they will ‘take home’ could be much smaller.”

Tax

It is widely expected that changes to inheritance tax are in the offing, whether this occurs in the Budget or afterwards.

Last year the Office for Tax Simplification (OTS) completed a two-part review into IHT, ordered by former chancellor Phillip Hammond in January 2018.

Various recommendations were made, including implementing a fully integrated digital system for IHT and simplifying gifting allowances. The OTS also called for a reduction in the seven-year rule to five years. This rule relates to the number of years that a person giving assets away needs to survive to avoid the recipient having to pay IHT.

More recently, at the end of January, a cross-party group of MPs called for a radical shake-up of IHT, cutting it from 40% to 10% for estates below £2 million. Those above this figure would pay 20%.

In its report, the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness suggested axing the seven-year rule in favour of a 10% tax on all lifetime gifts above £30,000 each year.

Tim Bennett, head of education at Killik & Co, would welcome simplification of the rules. He says: “The inheritance tax rules are peppered with historic oddities. These include the seven year time limit on Potentially Exempt Transfers and an array of different gift exemptions.

“Worse, a flat rate of 40% (applied in all but a few circumstances) arguably penalises the relatively small number of estates that are caught by this tax unduly harshly. Any simplification of the rules would therefore be welcome.”

Meanwhile, Sean McCann, a chartered financial planner at NFU Mutual, says mooted changes to the gifting rules are long overdue. He argues the various gifting allowances should be swept away “in favour of one annual simple annual tax-free gifting allowance of £15,000.

He adds: “This would be easier to understand, encouraging parents and grandparents to pass wealth on during their lifetime.”

One IHT rule change, which has been called for by some but looks unlikely to see the light of day, is the removal of business property tax relief, which various Aim shares benefit from.