Key aspects of the Budget were:
- Personal taxation
- Capital gains tax
- Higher earner pensions
- Tapered pensions allowance
The Budget included few changes in personal taxation, apart from raising the national insurance threshold to £9,500 as promised in the Conservative manifesto there were no other changes announced for income tax or inheritance tax.
Capital Gain Tax
There was no increase in the capital gains tax rate payable and the annual tax free allowance increased to £12,300. Capital gains tax relief given to entrepreneurs of start-up businesses will remain at the same rate of 10% tax on gains (half the 20% rate levied) but the lifetime allowance for this reduced tax rate will be cut from £10 million to £1million of taxable gains.
Help for higher earners whose pensions savings are restricted was forthcoming. The extra tax payable on pension savings currently affects those whose income is more than £110,000, with a reduced pension savings allowance applying once income (including employer pension contributions) exceeds £150,000. The standard £40,000 allowance for pension savings with tax relief is reduced by £1 for every £2 the income exceeds this threshold, so that the sliding scale currently results in a £10,000 annual allowance for those with income over £210,000.
Both income thresholds will be increased by £90,000 so that those with income of up to £240,000 including employer pension contributions, will no longer have a reduced annual allowance and will be able to save up to £40,000 per year into pensions with the benefit of tax relief. For those with earnings over £240,000 the annual allowance will be reduced on a sliding scale, so that once earnings exceed £300,000, the annual allowance will be £4,000, down from the previous £10,000.
Tapered annual pensions allowance
This increase in income thresholds will take many taxpayers out of the tapered annual allowance. A particular problem for the NHS, where consultants were refusing extra shifts as the impact of extra earnings on the tax on their pension benefits gave rise to unexpected large tax bills, and in some cases more than 70% of their earned income. While this increase in the threshold is welcome and will enable many earning between £110,000 and £240,000 to save more for retirement, those exceeding the £300,000 income will be worse off and may use other vehicles to save for retirement including Individual Savings Accounts and offshore investments.
The abolition of the taper allowance would have been a better solution. The danger of excluding the highest paid from pension savings is that it encourages senior managers and business owners to opt out of workplace pensions and could result in less attention being given to the quality of schemes at board level which could have an impact on the whole workforce. The way the annual allowance is calculated for those in defined benefit schemes can also lead to middle earners, who receive a large one off pay rise or bonus finding themselves exceeding the £40,000 threshold and having a tax bill on pension scheme benefits they cannot access till in their late 50s. It is a pity that the Chancellor did not take the opportunity to completely reform this complex aspect of pensions savings tax as recommended by the Office of Tax Simplification. Their proposal to restrict defined benefit pensions only by reference to the Lifetime Allowance and defined contribution pensions only by reference to the Annual Allowance is much simpler and fairer.
Wider reform of pensions savings tax, rumoured to be under consideration before the budget, which could have seen the rate of relief given on pension savings cut did not materialise. Each taxpayer will continue to receive tax relief at their highest marginal rate of tax, with death benefits also left outside the inheritance tax net, making pension saving one of the most tax efficient ways for long term savers to plan for retirement.
The stock market reaction was neutral with the FTSE100 index falling slightly at -0.25% following the Chancellors emergency spending package to tackle Coronavirus and his longer-term infrastructure spend of £175bn over the 5 year Parliament.
Further reading: Junior ISAs Budget allowance hike offers great opportunity