Ernst & Young Budget predictions: Personal taxes Patrick Stevens, tax partner at Ernst & Young, talks about his personal tax predictions for the Budget:
“One of the biggest challenges facing the Chancellor in this year’s Budget is personal taxation and how he will respond to the debate around how to tax people at different levels of the income scale. Could we see a mansion tax or other wealth taxes? How will he find the funds to raise the personal allowance? This could be time for a fundamental rethink about ways of raising revenue from the personal tax system.
Raising the personal allowance
“The Coalition has pledged to raise the personal allowance up to £10,000 and possibly even beyond. This will inevitably create a hefty dent in Treasury coffers. Over 3m people would be bought out of the income tax system altogether, resulting in a loss of over £1bn in tax revenue. But the biggest cost will come from the 23 million people who are paying the basic rate of tax, who will each be saving about £500, costing Treasury over £11bn.
Recouping the cash from higher earners
“If we assume that the Chancellor wants to create a broadly ‘revenue neutral’ Budget, where will the Government recoup these loses? It seems likely that Chancellor will look to higher earners. However, there is a risk that in an increasingly global economy, these individuals may choose a view of the Swiss Alps, rather than the M25 if their tax burden in the UK becomes too great. It’s a delicate balance, and may require a change of tactics by the Government.
Taxing income or taxing wealth?
“A broad ranging wealth tax may provide a more attractive solution to the Chancellor and a number of options have already been muted:
- Mansion Tax: It is difficult to understand why this particular form of wealth would be singled out for taxation. If a person chooses to retain their savings in cash or financial investments or has a number of smaller properties, they will be taxed more lightly than someone who has chosen to have a large house. Plus, how often would the property need to be re-valued and the tax contribution re-calculated?
- Council tax: Council Tax in its current form is a type of wealth tax, mainly falling on lower earners. A form of mansion tax could be introduced simply by inserting new higher level bands of council tax. The other major challenge is that council tax valuations have not been re-evaluated for many years.
- Inheritance Tax: IHT is a fairly inefficient wealth tax. Firstly, because it’s only taxed on average about once every 30 years as each generation passes away. Secondly, most Inheritance Tax is raised on people with estates of between about £500,000 and £1.5m. Beyond this threshold, individuals tend to pass on their wealth during their lifetime, avoiding IHT entirely.
- A return of the Banker’s Bonus Tax or Financial Activities Tax (FAT)?: The FAT was an EU proposal, produced at the same as the Financial Transactions Tax. Whilst the FTT has been ruled out by the UK government, a FAT has not been dismissed and may well provide an attractive revenue raising option.
- Another VAT hike?: VAT was raised to 20% last year, but remains relatively low compared to other countries across Europe so there is room for manoeuvre. Although a hike in VAT would require a substantial increase in tax credits and benefits so that the lowest earners in society aren’t impacted disproportionally.
What else are we expecting? Non doms remain under the spotlight
“We are also expecting to see changes to the taxation of non-domiciles to help encourage these individuals to bring funds into the UK to invest in businesses. The proposals were initially announced several months ago and have been under consultation. But there are still big question marks over what happens when a non-dom sells an investment made in the UK and how quickly they need to take it out of the country.
50% tax rate – the political ‘hot potato’
“Budget day will also see the publication of a much anticipated report on the 50% income tax rate, the ‘political hot potato’, and how much it has raised. We are expecting the sums announced to be significant. However the figures won’t reflect the behaviour of individuals that have left the UK or who have been discouraged from relocating here.
Integration of national insurance and income tax
“The Chancellor’s red box is also likely to contain a statement on the integration of income tax and national insurance contributions, which has been the subject of a review by the Office of Tax Simplification. For the time being, both taxes are likely to remain separate. However any measures to streamline the administration of these taxes will be welcomed by business.
Crack down on tax avoidance
“We are also anticipating a long overdue announcement about a crackdown on tax avoidance around Stamp Duty Land Tax. We hope the government grasps the opportunity to straighten out these rules in this year’s Budget.
Pensions remain a perennial problem
“Every year, there is speculation about whether the £50,000 annual allowance will be reduced, or whether the tax relief on pension contributions will be restricted to basic rate, as it was intended a couple of years ago under the previous administration. We could also see tax free lump sums being restricted or abolished. Any of these options would provide a substantial boost to Treasury coffers but will lead to an outcry from higher earners.
Taxation of very small businesses
“The Office of Tax Simplification has suggested that businesses with very low turnovers may be able to make some form of estimate of profits based on takings.
Time for a re-think on personal taxation
“Some of the personal tax measures that are likely to be announced in this year’s Budget have been under consultation for months, and in some cases years. So for issues such as the taxation of non-domicile individuals, the Budget will be a staging post.
“However, there is now growing pressure for the Chancellor to set the direction of personal tax policy more widely and to outline how and who he is hoping to raise revenue from. HMRC provided us with a ‘Corporate Tax Roadmap’ in 2010, and this could be an ideal time to provide us with an equivalent version for personal taxation.”