This week’s Budget went big on dubious jokes and even bigger on spending plans, as Chancellor Philip Hammond unveiled his version of Theresa May’s promised “end of austerity”.
Among the key announcements was the bringing forward of income tax cuts, the much-trailed extra funding for the NHS, and a raft of other handouts to some Government departments. What was even more plentiful was the number of consultations that will be launched, in areas as disparate as no interest loans for those in persistent debt to the much-delayed pensions dashboard, through to a report into the taxation of trusts.
But some of the biggest surprises were the areas where there were no changes – despite some of the ideas being floated ahead of the big day.
Pension tax relief reform
In the build-up to every Budget speculation abounds on whether pension tax relief will be changed. This is largely because it costs the Treasury about £25billion a year, and so looks like an easy target when any Government needs to raise cash. Hammond stoked speculation this year, branding it “eye wateringly expensive”, while a few strategic leaks from the Treasury definitely fuelled this further.
As it was, the word ‘pension’ wasn’t mentioned once in Hammond’s speech. The turnaround was likely due to the £13billion the Office for Budget Responsibility managed to find down the back of the sofa ahead of the Budget.
It will no doubt be a topic that rears its head ahead of the next Budget – particularly if we end up with an emergency Budget in the event of a ‘no-deal’ Brexit. However, it would be far more sensible to cut this speculation off at the source by taking the decision out of the Government’s hands and forming an independent commission to review the long term savings landscape.
This review could set in place the long-term plan for pensions, and provide a more stable system that savers could rely on. Any such plan should aim to simplify the system, and abolish both the lifetime allowance and the fiendishly complex taper rules.
Fix the errors with low earners
In the Budget it was announced the personal tax-free allowance will rise to £12,500 from next April, giving a boost to anyone earning over the current personal allowance of £11,850. However, the Government failed to help some low earners when it comes to their pension, with up to 1 million people missing out on the tax relief they are due.
Auto-enrolment means anyone earning £10,000 or more will be put into a pension scheme – unless they opt out. Anyone earning above £10,000 and below the current personal allowance will not pay tax but should still be eligible for the 20% tax relief you normally get on personal contributions.
A quirk with certain pension schemes, known as “net pay schemes” means that any contribution is taken out of an employee’s pre-tax salary and they miss out on this tax relief – a problem that will include more people once the personal allowance rises to £12,500.
The Government needs to come up with a solution for these people, particularly now more people could be caught in the trap.
More help for the self-employed
The Budget saw announcements that will potentially hurt self-employed people, with controversial IR35 tax reform being rolled out to the private sector. This means that many freelancers now face paying income tax and national insurance, while not getting the perks of actually being employed, such as holiday pay, sick pay and pensions.
The Government could have countered some of the effects of this move, and helped to solve the lack of pension, by reforming the lifetime ISA to help encourage the self-employed to save for retirement.
It should have reduced the exit penalty so that it is equal to the value of the Government bonus. This would ensure withdrawals for anything other than the purchase of a first home worth up to £450,000, retirement or ill health are not hit with a penal charge. Currently the Government takes back not just its 25% bonus but also effectively charges an extra 6.25% on your savings pot for these withdrawals.
Other reforms to the lifetime ISA could have included extending the age limit for opening an account beyond the current 18-39 range, to help those who become self-employed later in life. Another, more radical, option would be to allow the self-employed a higher annual limit on contributions – up from the current £4,000 a year.
Fixing IHT rules around pensions
Reform is sorely needed on the way IHT is applied to pensions. While in most cases pensions are free from IHT on death, there are circumstances where HMRC will charge the tax.
One example is where someone suffering from ill health dies within two years of transferring their pension from one scheme to another – their estate could potentially face a 40% tax charge, and a recent Court of Appeal case (Staveley) on this issue makes this outcome more likely.
It would have been far simpler and easier if the Government had taken the opportunity in this Budget to remove pensions from the IHT net altogether.
Laura Suter is personal finance analyst at AJ Bell