Next Wednesday, Chancellor George Osborne will stand up in the House of Commons and deliver an “emergency” post-election Budget. While surprisingly few details have emerged, he is under pressure to use the first Conservative (as opposed to coalition) budget since April 1997 to cut the top rate of income tax to 40% from 45%.
And given his recent article on welfare reform in The Sunday Times, he is almost certain to say that the government will continue with its plans to reduce the welfare budget. This will also affect those in work, since tax credits are expected to be a particular target.
Rather than cut the 45% rate, suggests Baker Tilly, the government might raise both the 40% and 45% income-tax thresholds. That said, high earners shouldn’t expect an easy ride. The Conservative manifesto explicitly stated that, in government, the party would reduce tax relief on pensions for those who earn more than £150,000. This could be done by capping relief at 30% and further reducing the annual limit below £40,000.
The lifetime allowance is already set to fall to £1m, which could hit many middle-income voters. Meanwhile, capital gains tax (CGT) will be in the spotlight. It’s one of the few major taxes that the government didn’t promise to leave alone, pre-election, and so we could see higher rates for short-term holdings, or a return to some form of taper relief, says Baker Tilly.
The government may even introduce some form of CGT on primary residences – in other words, CGT could be payable on profits from selling your house over a certain amount. However, he might also announce that the government intends to raise the inheritance tax threshold to £1m for family homes.
Osborne may also clamp down on “salary sacrifice” schemes. These allow employees to trade a pay cut for increased employer pension contributions, thereby lowering their tax bill, as my colleague Merryn Somerset Webb has noted on her blog.
At the opposite end of the income spectrum, he is likely to raise the personal allowance, to take even more people at the lower end of the income scale out of the income-tax net. There might also be a small above-inflation increase in the minimum wage, though this may be phased in over several years, or perhaps just be a stated “aspiration”. This would fit with arguments from all sides of the political spectrum that the state should not subsidise lower wages via tax credits.