Budget 2016 preview: What are we likely to see?
In our preview of Budget 2016, our head of tax, Tony Medcalf, offers his predictions.
It’s been barely a few months since George Osborne was basking in the glow of an election victory.
Subsequent summer budget and autumn statements saw several rabbits pulled out of hats due to lower than expected government borrowing costs and bigger than expected tax receipts.
Since then the forecast for the global economy has become gloomier with fears over another downturn and tax receipts expected to take a dip. There’s also the huge cloud of a possible EU exit hanging over the nation and the economy.
That said, Mr Osborne does have the certainty, for the time being at least, that interest rates are going to remain low, which means the costs of servicing the UK’s huge debt will also be lower. After the surprises of the last few major economic announcements it would be foolish to rule anything out, but I’m expecting a rather uneventful budget this time around.
For a few weeks there’s been speculation we might get another major shake-up of the pension system, with a flat-rate of tax relief, a potential scrapping of the 25% tax free lump sum, and the introduction of a maximum annual contribution all being mooted by analysts or leaked by government sources.
A flat rate of pension tax-relief would benefit lower earners far more than it would middle and higher earners and there had been widespread concern about the possible changes until George Osborne intervened earlier this month and said he was leaving pensions alone.
According to Treasury sources, now just wasn’t the right time to do it. However, if political strategists are to be believed, then it could be that Mr Osborne didn’t want to alienate a major part of the electorate ahead of an EU in-out referendum in June. It’s now unlikely we’ll see any major changes to the pensions system in this year’s budget.
The chancellor set his stall out on income tax some time ago. We know he’s in the process of raising the personal allowance to £12,500 and also has a long-term target of raising the threshold for the 40% higher rate of income tax to £50,000 by 2020.
Therefore, I would be surprised if there were any major announcements on income tax, but he may decide to accelerate the pace of some of these planned changes.
I still don’t think you can completely rule out a reduction in the top rate of tax back to 40p. The view that a lower rate of tax actually increases the tax take might well be justified, but it would be a very brave chancellor to do this in the current climate.
There is perhaps little more the chancellor can do on corporate tax rates, given that we already know they are due to be cut from 20% to 18% by 2020, and following not insignificant reductions in corporate tax rates over the course of the previous parliament.
That said, the government has said it intends to unveil another Business Tax Roadmap before April 2016 which means we’re likely to get some detail as part of the budget. Quite what the implications are for owner-managed businesses remains to be seen.
Capital Gains Tax and corporate M&A activity
Something we may see this time, which has been suggested previously but never introduced, is changes to Capital Gains Tax, bringing the current 28% rate in line with income tax for the sale assets such as businesses. This is an area where the government could increase revenues, though there’s also the possibility it will just encourage people to hold onto their assets.
This is something that would have implications for the business community, particularly owner-managers looking to exit a business.
Despite what the chancellor may say, the EU Brexit debate is casting a shadow over business confidence and certainty. As many businesses seem to be signing declarations that they want to leave the EU as want to remain. While there is always uncertainty, I wonder how many businesses out there are putting off major investment decisions until the issue is resolved.
Politically, the chancellor may feel the need to offer something of substance to the business community ahead of the vote in June, but quite what form that would take I don’t know.
I don’t believe there’s anything he could really announce that would assuage business’ fears in the short term as we won’t know what our future trading relationship with the EU will look like for some time.
Cigarettes and alcohol (and fuel)
Despite a recent rally in the price of oil, petrol prices are likely to remain at their relative low for the next couple of years, perhaps giving the chancellor the opportunity to add a couple of pence to fuel duty without a major backlash.
We’re also likely to see the usual pence or two on alcohol and cigarette duty to help boost tax revenues. This is always widely expected and nobody is really going to argue too strongly against the merits of that.
To speak to Tony about how any aspect of Budget 2016 may affect you, call him on 01772 821021.