In little more than two weeks’ time, George Osborne will present his 2016 Budget. This will be the Chancellor’s fourth major statement concerning the nation’s finances in less than 12 months, if you take into account the emergency summer Budget last July as well as November’s Autumn Statement.
A history of last-minute surprises
In contrast to the heavily trailed Budgets of Gordon Brown and Alistair Darling during the last Labour government, Osborne has developed a habit of pulling some major last-minute surprises out of his red box. In the last few years, he has announced significant reforms of both the state pension system and the way people can access their retirement savings.
More recently, there have been big changes to the tax treatment of buy-to-let investment as well as the introduction of a new tax-free savings allowance – not to mention the Innovative Finance ISA, which will allow tax-free peer-to-peer lending from April.
What to expect in March
Most of these measures caught observers off guard, with few if any details leaked to the press in the run-up to the big reveal. As such, it would be reasonable to assume there may be yet more headline-grabbing proposals in the 16 March speech. But over the past few weeks, the Treasury does seem to have been suggesting one or two areas which could be subject to change next month.
1 – Tax relief on pensions to change?
The most prominent of these has been the issue of tax relief on pensions. At the moment, most relief goes to high earners – which stands to reason, as they pay more income tax. But to many people, the status quo seems unfair: why should those who are already better off also get a substantial incentive from the state to save for retirement? Surely this money would be better used to encourage workers on low incomes to set aside more spare cash for their old age?
Some kind of reform looks inevitable, but exactly how the system will change is unclear. Osborne may decide simply to limit tax relief on pension contributions to the 20% enjoyed by basic-rate taxpayers at present. Or he may introduce a new higher flat-rate level of relief for all pension savers around the 25% or 30% mark.
2 – Abolition of the tax-free lump sum?
What else might the Chancellor have up his sleeve? There have been rumours that the 25% of each pension pot that savers can take as a tax-free lump sum could be abolished – but even if such a policy were introduced, it would be far more likely to apply to future pension savings than existing funds.
3 – Fairer pension settlement for women born in the 1950s?
Osborne may decide to introduce a fairer settlement for the thousands of women born in the 1950s who have been forced to wait several years, in some cases, to receive their state pensions. But his generosity is likely to be curtailed by the recent economic worries both in the UK and the rest of the world: a new slowdown would have a seriously damaging effect on the government’s ability to generate the tax revenues it is relying so heavily on over the rest of the current parliament. With a lot of uncertainty around at the moment, Osborne can be forgiven for limiting the giveaways and erring on the side of caution next month.