Budget 2013: It's Going to Get Personal

What could the Chancellor be preparing to spring on us individuals when he delivers the Budget on Wednesday?

Baker Tilly 19 March, 2013 | 9:00AM
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Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals.

The Chancellor may ... be considering extending ISA limits, incentivising people to use them as an alternative to pensions

The Budget, which will be delivered by the Chancellor on Wednesday, March 20th, is likely to be one of continued austerity while attempting to provide incentives for business growth.

For wealthy individuals there will be continued freezing of reliefs and allowances - for example, we already know that the Inheritance Tax (IHT) nil rate band will be frozen at £325,000 until at least 2019, and that tax relief for pension contributions will continue to be limited with a new £40,000 annual maximum and a £1.25 million lifetime allowance from April 2014.  While it’s hoped that after continuous tinkering with tax relief for pensions we will see another change, there is a possibility that the amount of tax free cash withdrawal could be changed from the current 25% limit to a set amount. For IHT, it would be good to hear of a much needed review – the current system is actually a tax on some lifetime gifts and the death estate and is not a tax on inheritance!

Possible Changes to ISA Rules

The Chancellor may also be considering extending ISA limits, incentivising people to use them as an alternative to pensions. However, he needs to be putting money back into the economy and so would need to extend ISA investments to unlisted securities and business investment, or extend some of the other business investment incentives, such as the Seed Enterprise Investment Scheme. Perhaps even a new incentive is needed as the current options are fairly limited and difficult to access.

The squeeze is likely to continue with the self-employed possibly seeing a hike in NIC contributions, as this would support the new flat-rate state pension proposals. But bringing the self-employed in line with the employed could potentially create a backlash at a time when these people are contributing to keeping unemployment figures down.

The Annual Residential Property Tax (ARPT) starts in April, charging an annual tax on properties worth more than £2 million owned by companies. There are some exemptions designed to ensure the tax falls purely on homes for personal use, held by tax avoidance structures. While no changes to these rules are expected, it could be an easy step for the future to extend this charge to all homes worth £2 million or more, whether held by companies or personally – in other words a Mansion Tax.  We don’t expect to see this in this parliament, but maybe in the next, depending who is in Government.

Predictions for the VAT

We are not expecting the Chancellor to seek to raise the current standard VAT rate of 20%. A 1% rise in VAT rate would generate additional income in the region of £5.6 billion but the impact on fiscal growth could be significant. The standard VAT rate in the UK is currently quite a bit lower than the average EU VAT rate (roughly 23%) so it’s not beyond the balance of probabilities, but in view of the political impact and the problems with pasty tax in 2012, it seems unlikely.

We could see an increase in the number of items which are subject to the reduced rate of VAT of 5%. VAT is an EU-wide tax and there are a number of goods and services which are permitted by the EU to be subject to the reduced rate. The UK does already apply either the reduced or zero rate to a number of the qualifying items but there has been a lot of lobbying on this point in recent times which may see a change. The most likely candidates would be repairs and maintenance to housing (as part of a social policy), hotels, catering and entertainment and cultural events.

We have also seen a rise in Insurance Premium Tax (IPT) especially around perceived VAT avoidance on the sale of VAT-exempt insurance with VAT-able products or services.  As a result we might expect to see additional items being included in the IPT arena.

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Baker Tilly

Baker Tilly  is an independent firm of chartered accountants and business advisers with 20+ offices throughout the UK.