PRE-BUDGET ANALYSIS: The kite is done… brace yourself as the budget seeks to plug the £50billion hole – little, it seems, has been ruled out
Kite flying: The act of finding out what people think of a potential new idea before it is put into practice
Ever since Rishi Sunak took office as prime minister last month and announced there would be a budget this Thursday, the political kite has been at the forefront. The kite – the act of finding out what people think of a potential new idea before it is implemented – has been commonplace as Sunak and Chancellor Jeremy Hunt have pondered how the hole of £50 billion in government finances can be tackled.
Little, it seems, has been ruled out.
There could be drastic changes to capital gains tax and dividend tax; the thresholds at which the basic rate and the top tax rate come into effect could be frozen well into the future; while inheritance tax thresholds could also benefit from the deep freeze treatment.
An additional 45% income tax, currently payable by those earning more than £150,000 a year, could even come into force at a lower level.
With tax cuts on pension contributions also being talked about, it all looks horribly bleak. Indeed, it is reminiscent of the kind of tax hike scheme Jeremy Corbyn had in mind had he won the December 2019 general election. So Labour, so un-Conservative. Red conservatism.
While the kite is all about sounding the mood music among the public for sweeping tax changes, there is usually another parallel agenda at play. That is, creating in the minds of the public that the budget will be nothing but a horror story – and then come up with a tax-raising package that isn’t as bad as people have been led to believe. Results? Relief all around.
Maybe. But this time, kites could all wreak havoc on our finances. Thursday’s budget could be the horror story we’ve been warned about.
SAFE BET: TRIPLE LOCK HONORED
It is inconceivable that the government is letting pensioners down for a second year in a row by waiving the triple-lock guarantee that applies to the state pension.
The guarantee, promising the greater of 2.5%, inflation or income growth, was broken last year by then-Chancellor Rishi Sunak in response to the negative economic impact of the lockdown – and the rapid increase in income as much of the workforce came off furlough.
Breaking the guarantee a second time will be seen by most pensioners – many Mail on Sunday readers – as unforgivable and a surefire vote loser in the next general election.
This is not just a view of state pension recipients who believe they are entitled to the 10.1% increase under the terms of the triple-lock guarantee – with the increase applying from April next year. It is also shared by others who have not yet reached state pension retirement.
Former postman Martin Shaw, from Bracknell in Berkshire, says he needs every spare penny to keep his financial head and that of his wife Julia above water.
“Yes, we have our own pensions,” says Martin, 72. “I get a half-decent pension from my postman years and Julia gets one from Tesco where she used to work. But money is tight.
“The triple lock guarantee must be respected. The state pension is a vital part of our financial arsenal.
Kim Cooper, a recently retired IT consultant from Rayleigh in Essex, is not yet old enough to qualify for the state pension. But she thinks the triple lock should be kept.
“I do a lot of volunteer work,” says Kim, 65, who is married to retired teacher Richard Dray. “Most of it is helping older people with basic needs like shopping.” She adds: “I see how inflation increases the cost of the basic goods they send me to buy. It’s a fight for them. An inflation-linked increase in their public pensions is therefore vital.
While a warranty breach is likely to be announced on Thursday, its long-term future cannot be assured. Last week, former Chancellor Philip Hammond said a review of the triple lockdown should be undertaken because of its cost.
WHO WILL BE THE STRONGEST UPPER?
While retirees are likely to be the budget winners, workers are likely to bear the brunt of a government tax grab.
The thresholds at which basic income tax and the top rate kick in will likely be frozen until perhaps 2028, causing more people to pay increasing amounts of tax as their incomes rise.
Although there are suggestions that the additional tax rate could be increased from 45% to 50%, this is unlikely given that it would break another commitment from the 2019 manifesto (not to increase tax rates on Income).
“It would be a wasteful move because it would yield so little,” says Jason Hollands, director of wealth manager Evelyn Partners. What is more likely is that the 45% could apply at a threshold below the current £150,000.
Wealth preservation is also likely to suffer as the zero rate inheritance threshold is kept at £325,000 – again possibly until 2028.
Higher capital gains tax cannot be ruled out, although the tax-free annual allowance could instead be reduced from its current level of £12,300. Dividend tax rates could also jump.
As for tax relief on pension contributions, reform is unlikely (it would be messy). But Hunt could reduce the annual amount that can be invested in a pension while receiving tax breaks. This currently stands at £40,000.
One pundit said the budget would likely be a financial version of China’s water torture for taxpayers. So prepare for the worst.