We reveal what you might expect from chancellor Rishi Sunak’s spending review on Wednesday.
Chancellor Rishi Sunak is set to give his first indication of how the government plans to recoup money spent on financial support during the pandemic when he delivers his first Spending Review on Wednesday.
The speech will set out forecasts for the economy and budgets of each government department for the next year, and is expected to confirm a public sector pay freeze outside of the NHS.
The review doesn’t typically cover tax cuts or rises, but the chancellor may signal his longer-term plans to payback the pandemic bill.
Pension tax relief
All pension savers get an extra 20% boost on their contributions from the government, known as pension tax relief. Currently, higher and additional rate taxpayers can claim an extra 20% and 25% respectively.
The relief cost the Treasury £38 billion in 2018/2019.
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There have been rumours at successive Budgets and spending reviews that this perk could be scrapped and instead everyone would get the same rate relief regardless of their tax bracket.
Reports in The Times last weekend suggested Sunak was “very attracted” to the idea of moving to a flat rate of 25%.
The state pension triple lock
Since 2011, the state pension has been increased using a formula known as the triple lock. This ensures it rises every year based on the highest of earnings growth, price inflation or 2.5%.
The House of Commons Library has estimated that the triple-lock in 2020/2021 is costing £5.6 billion more than simply linking it to earnings and £1.2 billion more than if it was linked to the largest out of earnings and inflation.
It would be strange for Sunak to suddenly abandon the triple lock though, as the government went to the effort of overriding a technical detail for next year that says if earnings growth is negative, state pensioners get no increase.
This would have frozen payment rises for those on the state pension, but the government instead introduced The Social Security (Up-Rating of Benefits) Bill that will remove any legal barriers to increasing the payments.
Capital gains tax
Sunak commissioned a review of capital gains tax (CGT) in July, and the Office for Tax Simplification (OTS) came back earlier this month with a raft of recommendations that could increase your tax bill if you are selling assets.
Currently, if you are selling an asset such as a share outside an ISA, you would pay CGT of 10% if you are a basic rate taxpayer, or 20% for those on the higher-rate.
There is also an annual exemption letting you earn £12,300 of profit from selling an asset before paying any tax.
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The OTS has recommended around £14 billion could be raised by cutting exemptions to between £2,000 and £4,000 and doubling the rates paid by basic and higher rate taxpayers.
Sunak asked for this report, so the recommendations may well give him food for thought.
Income tax and National Insurance
Currently, self-employed people pay class 4 national insurance contributions (NICS) at 9% a year, while those who are employed pay 12% a year.
Sunak gave a cryptic clue to his thinking on NICS when he launched the self-employed income support scheme in March.
He said: “If we all want to benefit equally from state support we must all pay in equally in future”. This could mean the self-employed are in line for a NICS hike.
Steven Cameron, pensions director at Aegon says: “The scale of the current funding gap means it’s not a question of whether, but of how, from whom and when Sunak plans to arrange that payback.
“Just like the virus itself, everyone is likely to be affected but in different ways.”
Cameron adds that now may be the time to make as much of incentives as you can such as topping up pension contributions or using allowances.
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