Tomorrow’s Budget is a big day for George Osborne. It’s an opportunity for him to burnish his credentials as a future Tory leader.
So he’ll ram home the message that the UK is in recovery mode. And he’ll want to take the credit for that. He’ll also tell us more about plans to extend the Help-to-Buy mortgage scheme.
But he’s unlikely to make it any more attractive for us all to save for the long run. And if anything, the tax system might get more complicated rather than simpler.
In short, he’s sticking to the plan – rely on a property bubble to deliver a short-term boost to the economy while pinching what pennies he can elsewhere…
Britain is growing again – but our debts are still massive
Let’s start with the good news. Osborne will almost certainly upgrade his forecasts for economic growth. He said last November that the UK economy would grow by 2.4% in 2014/15. His new forecast could be as high as 3%.
That extra growth could reduce the government deficit (its annual overspend) a little.
Currently, the Office for Budget Responsibility (OBR) expects the government to spend £730bn next year, while receiving £650bn in tax revenue. If those forecasts are accurate, we’ll have an £80bn deficit for the year. It may even be a bit lower in the end.
Trouble is, the long-term outlook for government debt is still grim. Even using the most flattering version of the government’s balance sheet, net debt stood at £1.23trn last November.
On current trends, it’s not going to start falling until 2019. And even to achieve that, we’ll probably need further spending cuts beyond those that have been announced already.
So the government isn’t in any kind of place to fund lots of giveaways. And that means investors should be looking out for nasty surprises, rather than pleasant ones.
Pensions: don’t expect any freebies here
On pensions, it looks like we’ll see some fiddling with the rules. The most likely change is to the rules for ‘trivial commutation’.
As things stand, if your total pension pot is worth less than £18,000 when you retire, you can take all of the money out as a lump sum. But if your pot (or pots) are worth more than £18,000, you have to use the money to generate an income – normally via an annuity.
Pundits expect Osborne to raise the overall limit from £18,000. He may also tweak the rules so that final salary pensions aren’t included when counting up the pension pots (in other words, you could effectively have a final salary pension and also save up a tax-free lump sum in a private pension, as long as it was smaller than the trivial commutation rules).
A bigger issue with pensions is the ‘lifetime allowance’. As things stand, if your pension pot rises above £1.25m in value, any excess is liable for income tax at 55%.
Now this seems a stupid way to do things. Say you pay in £100,000 to your pension pot over your working life, and your employer pays in £100,000. If you prove to be an above average investor, you could easily grow your pot to more than £1.25m, and end up paying some tax.
It’s patently obvious that a lifetime limit on contributions – not the size of the pot – would be fairer.
If you think your pension pot might be heading towards the £1.25m mark, I’d urge you to think about stopping any future contributions. Especially since a future government might be tempted to cut the allowance down to £1m. My colleague Merryn Somerset Webb wrote about this in the magazine recently – as she notes, it’s one of those areas where it’s worth talking to an adviser.
Isas: radical improvement is possible, but it won’t happen
For many folk, saving into an individual savings account (Isa) is a much more sensible option. It’s simpler, cleaner and easier to understand.
But that’s assuming the chancellor doesn’t make any changes to Isa regulation. There has been some speculation that he might introduce a lifetime limit on Isa contributions.
My hunch is he won’t do that, but it could easily happen were Labour to win the next election. So I’d urge you to pay the maximum contribution into your Isa if you can – that’s £11,520 for this tax year, which ends on 5 April.
Of course, if the chancellor wanted to make a truly radical change, he could abolish all tax incentives on pension saving and increase the Isa allowance to £30,000. Employers could be incentivised to pay into Isas too.
That would make things much simpler for everyone and could be a great way to boost savings and investment in the UK.
It’s not going to happen though.
Tinkering around the edges
What else might happen? Osborne said last year that the income tax personal allowance would rise to £10,000 in 2014/15. This is the part of your salary where you don’t have to pay any income tax.
There’s a chance that Osborne might try and make a splash by announcing an even higher allowance for next year, but I hope he resists that temptation. Raising the allowance by just £100 would reduce tax revenue by £3bn, and I’d rather see that money used to reduce the deficit.
The best way to simplify income tax in this country would be to merge income tax and National Insurance, but I doubt Osborne will take us any closer to that destination tomorrow.
Osborne has also decided that the ‘new build’ element of the Help-to-Buy scheme will now be extended to 2020. That seems like a dumb idea to me – the last thing we need is another property bubble.
What I’d rather see is changes to property taxation to make it fairer and to stabilise the market. Osborne is unlikely to do anything more than perhaps tinker with small measures to take a bit more from super-rich, foreign property owners in the poshest parts of London.
But stamp duty could really do with reforming: the current rules are confusing and distort the market. In a perfect world, the government would switch to a land value tax, where you pay tax purely on the value of the land, not any building on that land. It would be a great way to encourage a more efficient use of land in this country.
Unfortunately, there’s no way we’ll see anything that radical in the Budget. The best we can hope for is that he doesn’t do anything too awful to pensions or Isas. For more on what we’d really like to see in the Budget, you can take a look at Merryn’s list here (and please add your own ideas!).
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