Budget confirmation, speculation and new job support measures

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This week saw The Treasury confirm that they have scrapped plans for an Autumn budget, citing “now is not the right time to outline long term plans – people want to see us focused on the here and now”.

The scrapped budget

The Office for Budget Responsibility (OBR) calculated that the UK government would need to borrow around £55bn in 2020/21. By mid-July, the OBR updated its projections, and that estimate rose to £322bn – almost six times the original figure.

The Government in fact borrowed £35.9bn in August alone.

No government can continue to borrow at such a rate and many economists expected the autumn Budget as the moment when the brakes would start to be applied.

This might have momentarily stopped the speculation, but it is worth considering three key areas that are likely to come under scrutiny when a budget is eventually set out.

Pensions

The gross cost of income tax relief for pensions has been put at over £37bn by HMRC in its latest figures (for 2017/18), with a further £16.5bn for employee and employer National Insurance contributions relief.

The government launched a consultation in July 2020 on a technical aspect of pension income tax relief, a move that could be a precursor to a broader reworking. A flat rate of tax relief for all pension contributions has long been argued over by a variety of stakeholders.

In the March Budget, the Chancellor added to the cost of pensions tax relief by relaxing the annual allowance rules. There is a now a distinct possibility that, in his next Budget, the Chancellor could try to claw some money back by reducing tax relief for higher and additional rate taxpayers.

Inheritance tax

A report was commissioned over two years ago by the then Chancellor, Philip Hammond, on simplifying inheritance tax (IHT) from the Office of Tax Simplification (OTS). The OTS issued two reports, but no action was taken in the subsequent Budgets.

Matters may be different, come the next budget. Recent statistics from HMRC show that last year IHT receipts fell for the first time since 2017/18. The drop is possibly attributable to the impact of the Residence Nil Rate Band (RNRB), introduced in April 2017. The OTS reports did not make any recommendations about the RNRB on the grounds that it had only just come into being, but it did note widespread criticism of its complexity.

A Chancellor with an eye towards a ‘levelling-up’ agenda and a need for more revenue could pick and choose from the recommendations in the OTS reports to collect more IHT.

Capital gains tax

Out of the blue, the Chancellor gave the OTS another tax review to undertake in mid- July 2020. Capital gains tax (CGT) was the subject and this time there was less emphasis on simplification and more on ensuring ‘the system is fit for purpose’.

There is a real possibility that CGT rates will once again be aligned with income tax rates, which could see the top CGT rate increase from 20% (28% for non-exempt residential property) to 45%.

Pre-Budget tax planning will be required to avoid unnecessary or inappropriate actions.

New Job Support Scheme

The Chancellor also announced a new Job Support Scheme, starting in November which will run for six months.

The scheme replaces ‘the furlough scheme’ and means the government will pay part of workers’ wages who are working shorter hours.

This new Jobs Support Scheme will be launched for employees working at least a third of their normal hours, who are being paid for that as normal. The government and employers will jointly increase their wages to cover two-thirds of their lost pay and the employee will keep their job.

The level of grant will be calculated based on employee’s usual salary, capped at £697.92 per month.

All small and medium-sized businesses are eligible, but larger businesses must show their turnover has fallen during the crisis. Employers can use it even if they have not previously used the furlough scheme it replaces.

The existing grant for self-employed people is being extended on similar terms to the Jobs Support Scheme.

Government Loans

The Government guarantee on Coronavirus Business Interruption Loans will be extended to 10 years and a new successor loan guarantee programme will be announced in January.

The existing grant for self-employed people is being extended on similar terms to the Jobs Support Scheme.

A “pay as you grow” scheme was announced for businesses, allowing them to extend their bounce back loans from six to ten years, reducing their payments.

Businesses can also move to interest-only payments or suspend repayments for six months if they are “in real trouble”. Credit ratings will be unaffected.

VAT

The temporary reduction of VAT from 20% to 5% for the hospitality and tourism sector will be extended until 31 March 2021.

Companies that deferred their VAT bill no longer have to pay a lump sum in March 2021.

Income Tax

Extra support has been announced to allow people to delay their income tax bill – but it will still need to be paid. Millions of self-employed people or those who have one source of income will continue to complete a self-assessment tax form every year.

The Chancellor said that those with a tax debt of up to £30,000 will be able to set up a payment plan over 12 months to January 2022.

The levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

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