What Should Advisers Expect From The Spring Statement 2022?
Hearing about the Spring Budget or Statement? You’re not alone. The finance sector is always on edge when it comes time for these statements, as people know that there will be some sort of new tax law soon which may have positive or negative consequences. This year might seem like an exception though – with little information released so far by HM Treasury and none since Rishi Sunak spoke at length before his Autumn 2021 Budget Address last month! With the cost of living going up and little sign that things will improve anytime soon, many people are wondering what measures might be taken by Chancellor George Osborne to help ease their pain.
How Might Pensions Be Affected?
Some experts believe that with the upcoming budget from Chancellor of England Philip Hammond, there is a chance he will not cut taxes on higher earners in order to protect their investment losses. Pension tax relief is important in a high inflation environment. When prices go up, it can be hard for people to save for the future. This is especially true for retirees. So, cutting pension tax relief would not be a good idea because it would make it harder for people to save for retirement and could lead to more people depending on government assistance.
It is hard to know how much reducing the tax relief for saving into a pension would discourage people from saving. Many people do not understand how this works. For people who are in their later working years and are saving for retirement, it is more likely that they will be discouraged by this than by other types of savings or investments. The lifetime allowance has already discouraged them from saving. Any other disincentives would make planning for retirement much harder. Some want the limit on how much you can save into a pension without paying taxes (set at £1,073,100/$1,455,170, €1,272,580) to be raised. This was announced in the Spring Budget 2021. Another pension expert commented that the LTA was designed to limit the amount of pensions tax relief for the wealthy. But now it increasingly impacts many people who are not wealthy, particularly those with valuable defined benefit pensions. Many people could face a tax penalty if the limit on increases is not raised. Rishi should revisit this decision because of the current high inflation. Raising the limit would help people avoid penalties.
What About Taxing The Wealthy?
Raising taxes for the wealthy would be a popular move. The average household is being squeezed left, right and centre. And the effects of the war in Ukraine are being felt across the globe. One finance expert remarked that Capital gains tax (CGT) generated £10.6bn last year. This number is getting bigger as property and investment prices keep going up. There have been rumours that the current CGT rates of 10% and 20% (or 18% and 28% for property) might be scrapped and everyone will have to pay income tax on their gains.
The Office for Tax Simplification has said that investors should get some sort of relief from being taxed on gains from investments. This relief would mean that investors are only taxed on income that is above the rate of inflation. It is unclear if the government will actually do this, as it would mean less money for the government.
The government could cut the tax-free allowance from its current £12,300. The allowance has already been frozen until 2026, but the government could go one step further and cut the allowance in half to £6,000. This would generate £480m for the government.
Could Inheritance Tax Be Impacted?
The government has made a lot of money from inheritance taxes. The latest data shows that they made £5.5 billion from April 2021 to February 2022. This is an increase from the same period the year before. It is likely that the new minister of finance, Rishi Sunak, will either keep the current system, raise tax rates or lower the minimum tax-free amount. If the chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death.
Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75. If a tax was applied to inherited pensions, it would bring in a lot of money for the Treasury. How much money it brings in would depend on whether or not people who have already paid into their pensions are protected. If they’re not, people who paid into their pension based on the death benefits offered would be angry that those benefits were taken away from them.
This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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