The guessing game is in full swing. No more pension tax free cash. No more higher rate relief for pension contributions. More indirect tax on cigarettes, drinks and insurance premiums. Additional transaction tax on offshore companies doing business in the UK. Cuts in certain welfare benefits.
Sitting above all the detail is the desire by the Chancellor to provide the framework for a balanced budget linked to a shrinking of the public sector as proportion of the UK economy. The recent spate that arose when it was suggested that pension contributions should not receive any tax relief at all indicates the thinking; as does the leak over the weekend that the 40% tax band will apply at a much higher income level far sooner than expected.
Calculations show that because of the lack of tax relief on contributions, for a 40% tax payer it costs almost twice as much gross income to save the same level of retirement fund using an ISA compared to using a pension. At the net level the difference increases to over 287%. For a basic rate tax payer this difference falls to 156% of net income. Taking more taxpayers out of the higher rate tax band makes such a change to retirement savings more palatable to a larger number of voters while still benefitting the Exchequer. Existing pensioners will be immune from such a change and are likely to continue to benefit from favourable changes to taxation on savings and investments.
Taking more people out of higher rate income tax will benefit the economy if the tax savings are spent rather than saved. This is likely to improve the receipts from indirect taxes, particularly if rates are increased.
Holding the headline higher rate income tax at 40% will still bring in increased receipts if the ability to deduct allowable expenses continues to be curtailed as has already been announced for interest on buy to let mortgages.
The same framework strategy is in place for companies where the low headline rate is maintained but more businesses are expected to pay, particularly those that are based offshore. Tax on UK transactions as is in place for online gambling has proved successful and is likely to be extended to other sectors.
Capital taxes can be charged very effectively on assets that are located in the UK, whether or not the owner is resident in the UK. CGT is now chargeable on investment properties owned by non-residents and can be extended to other asset classes.