Budget 2016: What might George do?

2014-Budget-George-Osborne-Walks-Away-with-Box-700.jpgWhile the Chancellor has confirmed there will be no changes to tax relief on pensions in the Budget 2016, speculation is mounting that he may attempt to raise revenue through other means, with NI on employer pension contributions one of the least painful ways of doing so. Here are just some of the Budget predictions and analysis being floated ahead of tomorrow’s speech.

End National Insurance relief on employer contributions to pensions? Hymans Robertson partner Patrick Bloomfield: “An obvious target to finance plugging the deficit is the removal of National Insurance relief on employer’s pension contributions. If the Chancellor did this, by the Government’s own estimate it would raise around £14bn per annum. It wouldn’t affect pension tax relief and the impact on individuals would be marginal – particularly his heartland of voters, higher rate tax payers. It would essentially be a tax on jobs, but it wouldn’t be a ‘vote loser’.

“It wouldn’t be a surprising move for a couple of reasons. First, he hasn’t shied away from passing Government spending problems on to employers – the most recent example is the Living Wage. Second, using National Insurance is a classic solution to tax raising when there isn’t scope to increase income tax.

“Ending relief on NI would equate to a 1 to 2 per cent increase in salary costs to employers. This would come at a time when employment levels are at the highest levels we’ve seen in some time. It would mean that employers would have to cut back on pay budgets for a couple of years.”

“The infrastructure is largely in place to make this happen and the exemption for Class 1A and Class 1 employer contributions would easily be revoked.  Defined Benefit (DB) accrual contributions would need some work to measure the value, but the newly aligned tax year Pension Input Periods will make this much easier. This could also be rolled-out across the self-employed through individual tax returns.  It also leaves DB deficit contributions untouched, so the Chancellor couldn’t be accused of hampering employers’ efforts to repair DB deficits.

“Clearly there are big implications.  Businesses would need to prepare to absorb the cost. Or they could re-design pension plans to accommodate the loss of savings and still give employees an adequate level of retirement income.  Either way, if this happens, business leaders will need to quantify the problem and develop solutions post haste.”

More cuts or tax increases are needed for the Chancellor to meet his targets. Schroders senior European economist Azad Zangana: “The UK’s public sector net borrowing numbers are currently on track to end the fiscal year almost £10 billion worse than the Office for Budgetary Responsibility (OBR) had forecast back in November. Part of the reason behind the miss is the delay in implementing reforms of in-work benefits, along with the cancellation of the sale of publically held banking shares due to poor market conditions.

“Why should this matter? After all, UK Chancellor of the Exchequer, Osborne, has a poor record of meeting fiscal targets. After winning the last general election, the government legislated to introduce new fiscal rules designed to stop the ever greening of austerity. “Typically, there are three rules. Firstly, public sector debt as a share of GDP must fall in every fiscal year. Meeting this rule would have relied on asset sales, which may be difficult in today’s climate of uncertainty, not helped by the presence of Brexit risk.

“Second – a cap on welfare spending. This has already been breached.

“Third – the government mush achieve a fiscal surplus by 2019/20, with the deadline falling just days before the fixed date of the 2020 general election.

“In addition to this year’s £10 billion miss, there is another £10 billion missing from the chancellor’s plans. The OBR’s forecast for tax revenues is likely to be around £1.5-£2 billion lower from lower capital tax receipts, due to the fall in UK equity markets since November. In addition, current fiscal plans to not have provisions for the promised cuts in personal taxes including the raising of the personal allowance, and the lowering of the higher rate tax threshold – expected to cost the exchequer around £8 billion by 2019/20.

“So with around a £20 billion black-hole in the public finances and a softening economic outlook, the chancellor’s decision to blow a £27 billion windfall just four months ago by reducing austerity plans now look unsustainable. Indeed, speaking from the latest G20 meeting last week, he admitted that he will be forced to announce fresh spending cuts.

“The chancellor will be looking for additional sources of revenue, especially as the government’s tax triple-lock legally rules out increases in income tax, national insurance contributions and VAT.”

EFRBs, salary sacrifice and the annual and lifetime allowances reviewed? Broadstone technical director David Brooks: “Osborne may not have accounted for the billions of pounds due to be received by the Treasury in unclaimed tax relief and might now have a black hole that needs filling.

“A number of other areas might therefore be focused on. Employer financed retirement benefits schemes (EFRBs) may, although not liked by the Government, be subject to wholesale review; Osborne may look to amend the NI savings that salary sacrifice arrangements make – most likely a change to the employer saving or a restriction as to the level of salary sacrifice that can be used; or the Annual Allowance could be further reduced for everyone from £40,000 – or we could see a reduction in the salary threshold and total income measured for the tapered Annual Allowance.

“The Lifetime Allowance could also be reduced further for all from £1m (although the Government has previously pledged not to do this) but more likely is a change in the factor used for DB pension schemes (which is currently 20, but could become 25 or 30), making them more comparable to DC fund values and the equivalent income – this could push many more people who are in DB schemes over the Lifetime Allowance and so it is possible that this would only apply to new pension benefits. Pension ISAs, as mentioned above, could be introduced for new or young pension savers, but having two codes running in parallel would be difficult in practice. Flat rate relief is still the favourite to be introduced at some point in the future, although the 10-year lead suggested by an MP on Newsnight last week looks unlikely. Finally, there may be changes to tax-free cash, such as a reduction in future tax-free cash rights as a function of the future taxation method on contributions.

Secondary annuity market and early access to state pension? Aegon UK director of pensions Steven Cameron: “We may see next steps towards the secondary annuity market. And if he wants to be radical, the Chancellor could even build on last year’s pension freedoms by offering ‘state pension freedom’, for example allowing people to elect for a financially neutral reduced amount from an early age.”