Filtering out the Noise

I have not long returned from one of my annual holidays. I really felt the benefit of it probably because for a few weeks I did not have to put up with the daily leaks/speculation as to how the Chancellor is going to create the extra tax revenue she needs in the Budget at the end of November.

Before I left I had planned to make this missive about producing a pre-Budget Bingo card noting all the rumours as to how she would raise taxes but I had already called ‘House’ before I started writing!

There is no doubt many of the rumours are just media scaremongering and unlikely to be introduced. Although some in her party are keen on a wealth tax being introduced, if reports are to be believed, Rachel has ruled this out. I hope so, as a number of countries that introduced such taxes have subsequently removed them. Hopefully she has learned from the negative impact the non-dom tax increases have had on the UK finances. That legislation apparently resulted in 16,000 High Net Worth individuals leaving which will have cost the country Billions in revenue each year.

It is strange that some people celebrate the exodus of the wealthy from a country. As well as any income or capital gains tax they may pay, we also get 20% of all they spend via VAT as well as Stamp Duty on property they buy, never mind the lost tax and NI on any people they employ.

The truth of the matter is the vast bulk of tax raised in the UK is paid by a relatively small number of people. The numbers are quite scary. In tax year 23/24 £350bn was raised from income tax, of which over £100bn was paid by the top 1% of earners (those with incomes over £214,000), and in total over 60% of income tax was paid by the top 10% of earners. (Source - all stats Institute for Fiscal Studies Income Tax report 23-24)

In comparison in 1979 the top 10% of earners paid 35% of all income tax raised which shows those with the broadest shoulders are contributing far more to the exchequer than they ever have historically. In reality it would be more beneficial for the less well off if we had more wealthy people here, but I did not hear that espoused at the Labour conference.

Of course the more the government take in direct taxes the less the ‘wealthy’ have to spend which is no doubt one of the factors behind the lack of growth we are seeing in our economy compared to the US for example. As I have mentioned before, Americans I have spoken to are shocked at how little you need to earn in the UK before you pay higher rates of tax, and as these tax bands are going to be frozen for at least another two years this is only going to get worse.

In fact, anyone on the full State Pension next year will be a taxpayer, as for the first time ever this will be more than the Personal Allowance. So even someone with this as their only source of income will receive a tax demand from HMRC which they will have to pay by the 31st January the following year.

Of course the chancellor has backed herself into a corner with the pledge to not increase the rates of income tax or VAT but it is pretty obvious ‘workers’ are paying more tax and many pensioners will also find out they are doing the same. So where will she raise tax?

The biggest rumour has concerned pensions and whether tax free cash will be removed or reduced. Like a hardy perennial this rumour has bloomed before every budget I can remember, but this year it seems to have flowered more than ever due to the desperate state of the finances.

In our opinion it is highly unlikely tax free cash will be removed as this would affect public sector employees as well as those with private pensions. Of course the chancellor could reduce the maximum amount of tax free cash that can be taken, but in the grand scheme of things this would bring in buttons to the exchequer and it would be years before they noticed any increase in revenue as it would only be when tax was paid on the withdrawal from the pension which could be decades hence.

Having said that, I would put money on the amount of tax free cash you can get from your pension not increasing in the coming years, and as it looks certain the legislation to include pensions in your estate will be implemented in 2027, the advantages of leaving it within a pension from an Inheritance Tax point of view will be gone in eighteen months.

Therefore for those approaching, or at age 75, who have been leaving their pensions untouched to pass on to future generations, having a discussion sometime in the next eighteen months with your consultant on the pros and cons of taking the cash before then will be worthwhile.

So between now and when Rachel brings her Red Box out of number 11, I suggest you give yourself a mental holiday and ignore any stories that may appear, as like Halloween they are designed to scare you.

Steve Forbes

Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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