Could key tax allowances and reliefs be under threat?

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The Office for Budget Responsibility (OBR) have recently commented that with the current significant and unprecedented Government support to help deal with the Covid-19 health crisis they are expecting a budget deficit of £280 Billion in the 2020/21 financial year. With some businesses closed temporarily and many people either working from home or indeed furloughed, the UK Government has provided huge and welcome support to businesses and individuals to help, as far as they can, over this torrid period.

Whilst the Government can continue to borrow to support this investment this does, however, also mean the Government is clearly going to need to raise revenue to pay for the coronavirus crisis at some point in the future. This is likely to mean those on the highest incomes, and those with wealth, will be the ones who will be targeted when the time comes to do so to help pick up the tab. The OBR also highlighted that approximately £174 Billion could be raised relatively easily through a series of “Wealth Taxes”.

Key tax allowances and reliefs are therefore likely to come under increasing threat. For example, for many years now the subject of pension tax relief has been the source of great political debate. Whilst significant changes to allowances, both annual and lifetime, have been made to date until now higher rate tax relief on pension contributions has always remained in place. There are also a number of current available allowances and opportunities which could also be seen as “easy prey” by the Government to help balance the books. We highlight below some current opportunities that could therefore come under consideration.

Pensions Tax Relief for Higher Earners

Abolishing higher-rate tax reliefs for pension contributions has long been discussed when budgets come around but has always survived. Currently everyone in the UK that contributes to a pension receives tax relief at 20%. Higher rate taxpayers need to claim the additional 20% through self-assessment. Also, in the March budget The Chancellor actually announced a relaxing of the rules on how much higher earners can save into their pensions while receiving tax relief. This policy could well be reversed as quickly as it came.

Inheritance Tax including – Trusts

According to data from HM Revenue & Customs published in October 2019, in the first 6 months of the last tax year IHT receipts reduced £316 Million to £2.4 Billion, compared to the same period the previous year. This was considered to be partly as a result of the introduction of the Residential Nil Rate band allowance, which was first introduced in April 2017. The subject of further IHT reform has been on the agenda now for a number of years, however, we should maybe now be expecting a further tightening up on this area rather than any beneficial changes.

Reducing Capital Gains Tax Allowances

The current allowance for each individual is £12,300 (Trusts allowance -£6,150). This means you can hold an investment (OEIC/Unit Trust/Investment Trust) or other investment assets (other than your own home) and the profit will only be taxed after the allowance is taken off. Reducing this allowance would be another way to raise additional tax revenue.

ISA allowances

Each individual currently has a £20,000 overall ISA allowance per tax year with all capital growth and income free from taxation. ISA allowances have increased gradually since they were first introduced back in 1999, however, could now be the time to see a different approach to this valuable savings allowance?

Whether these, or other changes, happen will clearly be up for debate and consideration when we get to the other side of Covid-19 and all the related challenges it has brought with it. However, for those people who are considering taking advice in any of the above areas we would suggest that now would be a good time to do so, whilst we definitely know the allowances and opportunities remain fully available.

At Armstrong Watson we provide personalised financial advice. Our quest is to help our clients achieve prosperity, a secure future and peace of mind. We can provide a full review of your financial affairs and discuss the opportunities available to you with our compliments in the first instance. We can also now do this remotely by video, telephone as well as face to face.