Pre-budget report should simplify tax affairs for high earners

December 7, 2009

Julia Whittle_PSFM - Hi Res Colour Mar 06-Julia Whittle is principal and head of international, Punter Southall Financial Management. She will participate in a Reuters pre-budget live blog on Dec. 9, at 12 p.m. British time. The opinions expressed are her own.-

The attack on high earners has probably not reached a pinnacle and those earning above £100,000 have reason to be nervous in this current climate. The Pre-Budget statement so close to an election shouldn’t produce anything too drastic as there is little time to implement anything radical or complicated. However an attempt at some “vote winners” is a distinct possibility.

A ‘wealth tax’ has been rumoured, a potentially popular move and common across Europe, but it would be complicated to set up and would certainly deter people even more from coming to live in the UK and establish wealth here, so it is not particularly likely.

A windfall tax for a short term (maybe one year) on bonuses could be on the agenda.

IHT increases have been on the cards for some time perhaps for larger estates, for example a 50 percent rate on 1 million pounds perhaps which could be popular with grass roots Labour voters. There has been talk of an increase in the time required for lifetime gifts to become exempt – 7 years to 15 perhaps – but this is probably not exciting enough as a revenue earner.

Income tax
The personal allowances for incomes of over £100,000 are unnecessarily complicated – some simplification would be welcome here but it is probably not a key item on the agenda.

Capital Gains Tax
The issue of 18% capital gains tax has been discussed as a possible target for increases to bring it into line with the 50% top rate. However, this is again unlikely as it would be well out of line with other European models and not a huge vote winner, though further restrictions on adapting income to CGT rather than income tax regime are more likely.
But there could be a restriction or removal in the carrying forward of losses!

We would like to see an increase in tax relief for private investment into smaller businesses- e.g. an increase in thresholds for VCTs.

We expect to see some of the proposed detail around how relief for pension contributions will be tapered from 50 percent to 20 percent for those earning between £150,000 and £180,000 from 2011 onwards and would like to see some simplification of the current “anti-forestalling” provisions designed to prevent individuals making extra pension contributions before the new rules come in, but think it unlikely.
Since the restrictions on pensions tax relief were announced, pension adaptations as tax planning tools such at Employee Benefit Trusts and EFRBS (Employer Financed Retirement Benefit Schemes) have been of increasing interest as in many cases these can give better tax advantages for higher earners than registered pension schemes. We may therefore expect more tightening here.

Tax relief on pension contributions for higher earners has already been drastically reduced so the rumours of scrapping higher rate relief altogether on pension contributions are always a possibility, but potentially irresponsible given the need for individuals to provide for their own retirement even more in the future. There has also been mention of possible restrictions to tax free cash. We are strongly against this – as the constant tweaking of the regime makes people – at all pay levels – turn away from pensions.

ISA increases have been announced and we wouldn’t expect to see any changes here.

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