Osborne to show no sympathy for middle or high earners
-Nick Earl is partner at chartered financial planners Wardour Partners LLP. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-
On Tuesday we will hear the first budget from new Chancellor George Osborne.
From the snippets of information we have heard from the Lib-Con coalition camp, I do not anticipate this budget will show much sympathy for middle or high earners.
It is unlikely that the government will revise the higher rate tax-relief rules for those earning in excess of 150,000 pounds per annum.
A more possible outcome is that higher rate relief could be withdrawn altogether and should this happen it will be those who earn between approximately 40,000 pounds and 130,000 pounds who suffer the impact the most.
However, with this being an area that the Conservatives and Liberal Democrats disagree on, it is perhaps more likely to be a compromise where pension tax relief is scrapped for earnings over a set level.
Good news for those earning 10,000 pounds or less is that Osborne has already announced that he intends to raise the personal tax free allowance to 10,000 pounds from the current level of 6,475 pounds for those aged under 65 – meaning they will no longer pay tax at all.
This won’t be a great benefit to high earners however as, following changes in April this year, those who earn over 100,000 pounds no longer receive full personal allowances.
Another possibility is the capping of the annual allowance individuals are able to tax-efficiently contribute to a pension scheme. This stands at 255,000 pounds in 2010/11, however, with changes to tax relief for high earners, many will probably lose interest as it is no longer so tax-efficient.
Should the allowance be restricted for everyone, including high earners, then they may still allow higher rate tax relief on these contributions.
In terms of capital gains tax, there has been much talk that this will increase and if so it is likely that this won’t be popular.
The actual increase has yet to be agreed but it is clear that it will be more in line with income tax – so a potential increase to 40 percent with the option of taxing up to 50 percent not being ruled out.
Discussions have also centred on CGT relief for entrepreneurs and so I expect the budget to outline exactly what this means and the possible level.
Reverting to indexation relief is a possibility, as well as tapered relief to reward longer-term investors.
And finally inheritance tax (IHT). I do not believe that there will be a change to the current level of 325,000 pounds even though early Conservative proposals aimed to increase the nil rate band to 1 million pounds.
Potentially, the budget could place some restrictions on the tax, for example the Non Domicile rules may come under renewed scrutiny.
We will only know the full impact of the budget changes on Tuesday but whatever happens, businesses and individuals alike will no doubt have to re-evaluate the management of their finances.