Spring Budget 2017
Keeping his promise to position all major announcements in the autumn so there is sufficient time to implement any changes, the Chancellor tinkered rather than tackled in Wednesday’s Budget. But he also hinted at wider reforms to come.
No alterations to previously announced changes in income tax, the capital gains tax annual exemption, inheritance tax exemption and corporation taxes. However, the Chancellor announced reforms to National Insurance Contribution (NICs) payments for the self-employed. It had already been previously announced that Class 2 NICs, which are paid at a flat rate, were to be abolished in April 2018. Additionally, from the same date, the level of NICs levied will rise from 9% to 10% for earnings between £8,060 and £43,000. Class 4 NICs will then rise to 11% in April 2019.
The government also announced a consultation on removing inconsistencies between the tax treatment of ordinary remuneration and the taxation of benefits in kind, accommodation benefits and employee expenses for employed workers. In doing so the Chancellor is flagging possible further changes in the Autumn Budget later this year.
To avoid the self-employed circumnavigating the increase in NICs via the use of incorporation, the Chancellor will reduce the dividend allowance – which only came into being this tax year – from £5,000 to £2,000 from April 2018. This measure will have an impact on those with unwrapped portfolios and highlights the importance of utilising general ISA allowances to shelter income.
There will be widespread relief that there are no changes to either the annual allowance or lifetime allowance beyond those previously announced. However, in its Budget paper, the government sets out a 25% charge on transfers to Qualifying Recognised Overseas Pension Schemes effective on transfers requested on or after 9 March 2017. This change is designed to target those who seek to reduce the tax payable on their pension assets by moving them to lower taxation jurisdictions. There will be some exemptions for those who have a ‘genuine need to transfer their pension’ and those located in the European Economic Area.
As part of the crackdown on tax avoidance schemes that are deemed to be outside the spirit of the law, the Budget set out measures to introduce penalties for ‘Promoters of Tax Avoidance Schemes’ (POTAS). They are defined as professionals who have enabled an individual or business to use a tax avoidance arrangement that is later defeated by HMRC. The government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for those businesses and people who use those arrangements.
Later Life Planning
As widely expected the Chancellor reacted to the deepening concern over the funding of long-term care by earmarking a further £2bn for distribution to local governments over three years to spend on adult social care services. In the longer term, the government will publish a green paper outlining proposals for financing adult social care (long-term care) later in the year. The Budget made no mention of the Dilnot Commission report, so until this new paper is published it is unclear whether the commitment to introduce a cap (which was delayed until 2020) will be retained, amended or abolished.
Helen Ingleson, Head of Advice and Research, Rathbone Financial Planning
The Chancellor states that Britain is on track to borrow £26bn less than expected over the next five years. However, that’s largely due to a significant improvement in receipts this year; borrowing in the final years of the forecast period was left unchanged since the Autumn Statement. Still, this isn’t really a Budget for the fiscal hawks: projections still show a £16bn deficit halfway through the next parliament – the deficit was meant to be eliminated at the end of the previous parliament! Using the cyclically adjusted current budget deficit to interpret the degree of fiscal thrust or drag, 2017/18 is now on course to be the first year of fiscal thrust since 2009/10. However, this respite from austerity will be very brief: fiscal drag will resume in 2018/19 to the tune of 1% of GDP, and will continue into 2019/20 at a much more aggressive level than the amount forecast in the Autumn Statement.
The Office for Budgetary Responsibility upgraded its forecast for this year’s growth to 2% from 1.4% in November. However, growth in 2018, 2019 and 2020 has been revised down to 1.6%, 1.7% and 1.9% respectively – a cumulative downgrade of 0.7%. The prospective growth rate in 2021 remains unchanged at 2%, higher than our own estimation of the sustainable long-term rate of expansion, which we now put at between 1.5 and 1.75%, unless productivity growth improves in a major way. To that end, it is disappointing we didn’t see the Chancellor upgrade his meagre infrastructure package, announced during the Autumn Statement, which equates to just 0.3% of GDP over the period of implementation.