Great expectations: Budget 2017
There are some key areas for the Chancellor. Perhaps the most important is the idea of ‘intergenerational fairness’. It has become increasingly clear that the young are trailing the old. They are priced out of the housing market, struggling on lower wages and unable to save for the long-term. In the meantime, retirees appear to be largely protected from the effects of austerity.
Housing will be another key area of focus. The housing market is also reaching crisis point. There are concerns that stamp duty changes in recent years are distorting the market and first-time buyers are at an increasing disadvantage. We outline some of the areas to watch out for on 22 November.
This may be the Chancellor’s biggest challenge. Cutting pensions is never going to be a vote-winner with the Tories’ heartland, but even retirees recognise that the issue needs to be addressed. An obvious option would be to cut pension tax reliefs to fund a reduction in National Insurance Contributions for workers in their 20s and 30s. Either way, pensions tax relief looks vulnerable, particularly for higher rate tax payers. The government may move to a flat rate of 33%, which would hit those on middle incomes hardest.
A shake-up of student loans may also be on the table. At the Conservative Party Conference last month, the Prime Minister promised to freeze tuition fees at £9,250 and increase the repayment threshold from £21,000 to £25,000. There is also discussion of linking tuition fees to a university’s employability rating.
At the same time, dividend taxation may also be under threat. The dividend allowance is due to be cut from £5,000 to £2,000 from April 2018 anyway. Increasing dividend tax or cutting the tax-free allowance further might be a quick win for the government because it is mostly paid by older people. The Chancellor may be wary of the effect on small business owners, however, who often take their payments in dividends.
Affordable housing is a huge and growing issue. The Resolution Foundation points out that the cost of housing has been rising for the last six decades with young people today spending almost a quarter of their income on housing – three times as much as the pre-war generation. Stamp duty may be the first target for reform.
The Land Registry shows that the average price of a property for first-time buyers in London is £428,546, which means handing over £11,427 in Stamp Duty. The recent changes in stamp duty land tax (SDLT) in recent budgets saw the government collect £2.6bn in residential stamp duty receipts in the third quarter, up 23% year-on-year. There has been criticism that stamp duty is now acting as a major deterrent to housing market mobility. It is deterring those at the top end from downsizing, for example, which isn’t leaving enough supply for those moving up the housing ladder.
There is, as yet, no clarity on what the Chancellor will do. Some have called for stamp duty to be abolished altogether. The Adam Smith Institute, for example, suggested that it may destroy almost as much wealth as it generates in tax receipts. It proposed abolishing SDLT and replacing the lost revenues by reforming council tax, with a more proportional tax based on rental values. The Chancellor may shy away from such a radical shake-up, but there could still be significant change. At the same time, Help to Buy is set to get a £10bn boost.
Rogue landlords may come under fire and with them, buy-to-let property in general. In particular, second homeowners may be hit, either through further hikes in stamp duty or attacks on property income.
While capital gains tax and inheritance tax look set to stay the same, tax consultants, RSM, believe that the Enterprise Investment Scheme (EIS) may be hit. This provides income tax relief worth 30% of any investment in high-risk companies, alongside Capital Gains Tax exemption on disposal of the shares.
Business groups want Hammond to emphasise that the UK is ‘open for business’ in the wake of Brexit. The CBI has set out a series of measures aiming at bringing the UK’s industrial strategy to life and shore up the economy in the face of mounting challenges.
In a bid to improve pollution levels, diesel drivers are likely to be hit with higher fuel duty and higher taxes on their vehicles.
Watch this space….