What's in store for tomorrow's Blue Budget?

2 July 2015
Chancellor George Osborne has developed a reputation for delivering big surprises in his Budgets. But what could he have up his sleeve this time? We've rounded up expert predictions for tomorrow's emergency Budget to try to give some indications of what to expect. Doubtless Osborne is holding back a couple of headline-making surprises, but it's possible to make educated guesses based on the Conservative manifesto. This is the first Tory-only Budget since 1996, and some say it's likely to be one of the toughest, from a new government that no longer has to moderate its policies to placate coalition partners. PensionsThe Tories promised in their manifesto to crack down on pension tax relief for those earning more than £150,000. They could do this by reducing the annual allowance by £1 for every £2 earned over that limit. The result is a decreasing amount of tax relief as earnings rise. If someone earned £210,000, for example, they'd have an annual allowance of just £10,000. Tom McPhail at Hargreaves Lansdown worries that Osborne could introduce further restrictions on the annual allowance, possibly coming into effect on Budget day itself. "If they are contemplating change to the pension system then a move to a flat rate of relief of 30%, coupled with the abolition of the increasingly unpopular lifetime allowance limit, would be simpler and fairer for all," he says. The previous Budget included plans to lower the lifetime allowance from £1.25 million to £1 million in April 2016. Note that this limit includes investment growth, not just the amount contributed. Rob Burgeman, investment manager at Brewin Dolphin, says: "Why not put a simple cap on how much people can pay into their pensions? Otherwise they are essentially being penalised for a successful investment strategy." Inheritance taxThe manifesto pledges to raise the inheritance tax (IHT) threshold substantially. From 2017 the current £325,000 tax-free threshold will increase to include a main residence allowance of £175,000, effectively increasing the total tax-free threshold to £1 million for married couples and civil partners. "I’d expect to see the IHT change introduced at the same time as the reductions in pension tax relief," says Hargreaves' Danny Cox; "however, a fairer and simpler incentive would be to increase the nil rate band for all assets." Cox's concerns were echoed by Brewin's Richard Harwood, who said there is a danger of making IHT "overly complicated". Tax and national insuranceThe manifesto pledges to increase the higher-rate income tax threshold to £50,000 by 2020, and possibly raise the personal allowance to £12,500. This is unlikely to come into effect before April 2016, says Hargreaves. "At the moment the tax system is prejudiced against families where one parent works and one is more active in childcare," says Brewin's Burgeman. "We would like to see a change... so that couples could elect to be taxed jointly, with two sets of all allowances and two sets of pension allowances." Capital gains taxCapital gains tax will be notable in its absence from the manifesto. "We would like to see a reform of capital gains tax," says Burgeman. "It is a very complicated tax that creates distortion. A big problem is that it does not make any allowance for inflation, so over long periods even modest amounts of gains can have a big impact." But Cox warns that tinkering may just prompt investors to "sit on their hands rather than realise gains", resulting in a lower tax take. "Investors should be rewarded through the tax system for holding an investment for a longer period," says Cox. "Currently there are no incentives to hold an investment for any period of time. Rewarding investors in the tax system either through a reintroduction of taper relief or indexation, will help them to make better decisions, rather than being forced to buy or sell based on the tax they might pay." Regardless of what experts predict, we won't know for sure until Wednesday 8 July, and making investment decisions based on such an uncertain outcome might not be prudent, argues Andrew Craig, founder of Plain English Finance. "I would argue that to make any kind of substantive investment decision around these kinds of events is to risk negatively impacting your ability to succeed as an investor over time." This article was written for our sister website Money Observer

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