What are the experts predicting for next week's Budget? And are they right?
It's the Budget next week, which means industry experts are lining up to predict what they think will - and what they think should - be in George Osborne's big red box. So we are going to take a look at some of those predictions, and how likely they are.
Let’s start by looking at what might happen to child benefit:
Child benefit
This is an issue that could make a big difference to many middle income families in the UK. Under the current plan, anyone earning more than £42,745 a year won’t receive child benefit from January 2013.
Newspaper reports suggest that the threshold will be raised to £50,000. That will help some people, but I’m in no doubt that some mothers will still feel hard done by. A stay-at-home Mum with a husband who earns £51,000 a year won’t get any child benefit, but a couple who both earn £49,000 a year will still get the benefit.
Check out How to keep your Child Benefit.
Pensions
If you’re a higher rate taxpayer, you can get 40% tax relief on any contributions you make to your pension fund. Indeed if you pay 50% taxpayer, you can get 50% relief.
The Government loses £7 billion a year thanks to this concession, so it’s not surprising that many Liberal Democrats think that the relief should be cut back. There are several ways you could do this. Different pundits are suggesting different routes:
- Pensions guru Ros Altmann has suggested that tax relief for top earners could be cut from 50% to 40%.
- Grant Thornton, the accountancy firm, thinks that Osborne may be more ruthless and cut all pension relief to 20%. That would raise £7 billion a year for the Government.
- Malcolm Mclean at Barnett Waddingham has suggested that all pension tax relief could be withdrawn from people earning more than £150,000.
There have also been several newspaper reports saying that Osborne is ‘signalling’ that he’ll cut the annual allowance of tax-free pension saving from £50,000 to £40,000. In other words, if you pay more than £40,000 into your pension pot in one year, you won’t receive any tax relief on the contributions in excess of £40,000.
It sounds like Osborne’s press team has been telling journalists that this is the plan, so it’s the most likely outcome. It would raise about £600 million which could go towards some tax cuts for the lower paid – a priority for the Liberal Democrats.
Personally, I think there should be no more cuts to pension tax relief – I explained why in Tax raid could cut your pension by £3,000 a year.
Income Tax and Mansions
The Liberal Democrats – and some Conservatives – are keen to increase the threshold at which you start to pay income tax. It currently stands at £7,475 and the plan is to push it up to £10,000 by 2015.
But how big an increase will we see in this budget? And where can Osborne find the cash?
Lib Dems have pushed for increased taxes on the wealthy, perhaps a ‘mansion tax’ on properties that are worth £2 million or more.
Jackie Ashley in the Guardian reckons there will be a tradeoff between the two policies:
“It looks likelier that he’ll [Osborne] produce a fudge – a bit more on thresholds, not much, and a mansion tax diluted enough to calm rich Tories – which pleases neither the tax-cutting Tory instincts nor the ‘full fairness’ agenda of the Lib Dems.”
But Crowe Horwath, another accountancy firm, predicts that Osborne will tax expensive property in a different way – by increasing Stamp Duty when top-end properties are sold. That seems the most likely approach to me too.
Moving on to 50% income tax, Grant Thornton thinks that Osborne won’t cut the rate for high earners at any point in this Parliament.
Corporation Tax
Corporation Tax was at 28% when Osborne became Chancellor, it’s now at 25% and will fall to 23% by 2015. David Smith in the Sunday Times thinks (paywall) that Osborne will reveal plans for further cuts to 20% although the timescale for this is unclear.
Smith’s suggestion is plausible. Osborne will feel that he can't afford such a big cut this year, but he’ll want to reassure business that he is a tax cutter at heart.
VAT
Grant Thornton thinks there’s an ‘outside chance’ that Osborne will introduce a 25% VAT rate for some ‘luxury items'. That could be an effective way to tap the rich for some extra cash, but I suspect that Osborne will leave VAT unchanged in the end. Pushing up VAT will be a hard sell politically.
So that’s a quick look at what might be in the Budget next week. What do you think the Chancellor will announce? And what would you like him to announce?