Summer budget speculation

Summer Budget Speculation On Wednesday, George Osborne will present his first budget following the Conservative victory in May’s General Election. It is expected the Osborne and the Cameron government will be making a broad range of cuts in this upcoming budget. Most of these cuts will be from social services and welfare. Also, experts speculate there will be a change in the tax rate.

Summary - According to BT Money, Osborne may announce a plan that would make future governments run a surplus during good economic times.

- There may be a salary sacrifice. BT Money reports that former Pensions Minister Steve Webb suggested the Treasury consider scrapping salary sacrifice to increase tax revenue. These schemes allow an employee to forego a portion of their salary in return for a benefit from their employer. As a result, the employee earns less in salary, but the employee and employer pay lower in National Insurance contributions.

- The government has already made a commitment to not raising income tax, National Insurance, or VAT and will likely continue the previous Coalition government's policy of increasing tax-free income personal tax allowance.

- Osborne plans to propose what David Cameron has called a lower tax- lower welfare economic plan.

This includes a cut in the top tax rate from 50 to 40 percent, a ten percent decrease from Labour’s top rate. Financial Times George Parker and Vanessa Houlder.

- The cuts come at a time when some speculate that households are £500 worse off than they were before the 2008 economic decline. This happens as David Cameron hopes to create a higher wage economic policy instead of supplementing struggling workers through tax credits. The Guardian reports that British households are £500 a year worse off than they were before the economic decline of 2008.

The Guardian, Heather Stewart - To create this higher wage system Osborne and The Conservatives will attempt to cut £12 billion in tax credits from the welfare system.

Pensions Richard Dyson speculates, in his article for the Telegraph, that one thing George Osborne should do in his first conservative budget is scrap tax breaks for final salary pensioners. Dyson feels that is one tax unfairness that can be corrected and it may not cost the Chancellor of the Exchequer anything.

“It’s the unfairly beneficial taxation of “final salary” type pensions, enjoyed among others by civil servants and MPs themselves, compared with the more common “money purchase” pensions,” Dyson said.

Currently, someone with a final salary type pension can start their retirement with an income of £50,000. This allows the pensioner to escape paying any tax under the pension “lifetime allowance.”

This is in stark contrast to a money purchase saver who would only be able to start at £28,600 before being hit with a PC tax. For a money purchase saver to obtain the same amount as a final salary pension, they would need a pension of £1.6 million.

Dyson argues that the lifetime allowance is an ill-judged tax which hurts young savers who invest successfully. He believes that this tax is unfairly applied and should be taken care of.

According to the Financial Times, five things are planned regarding pensions in the upcoming budget.

1. Freedom to sell your annuity: Hymans estimates, for example, that retirees who invested £50,000 in a pension five years ago, at 65, will have bought an annual pension of £3,600, based on bond yields then.

2. Overhaul of tax relief on pension contributions: The Government currently tops up pension contributions according to the rate of tax you pay. So a basic rate taxpayer, for example, contributes only 80p to have a total £1 put in their pension. Each 60p a higher-rate taxpayer puts into his pension the Government tops up with 40p. The result is that 75pc of the £24 billionn relief given to individuals goes to higher earners. However, these are the workers who pay the most tax.

3. New Pensioner Bonds 4. Tax breaks to pay for care: With the government hoping to cut costs to care there would be tax breaks for another suggestion is that where pension income is used to pay for care, then it should be paid free from income tax.

5. Holding property in pension funds: Allowing pension savers to hold property in their pension would be a vote winner, not least given the large numbers investing in buy-to-let for the retirement. Ability to shelter these arrangements from income and capital gains tax would prove enormously popular.

Inheritance Tax The Guardian reports that along with cuts in welfare, the Conservative Party plans to lift the inheritance tax on all but the richest households. This will allow houses worth £1 million to be passed along without a burden from the taxman. Osborne will create a £175,000 tax-free allowance per person for a main property on top of an existing £325,000 allowance on all assets.

While many in the Conservative party champion this as a way to fulfill their manifesto’s promise of the “Conservative Dream,” The Institute for Fiscal Studies speculates that this proposal will only be beneficial for wealthier people and may have a negative impact on the property market if older homeowners are discouraged from downsizing.

These changes cost around £1 billion and will come from cuts to tax relief on pensions by possibly relieving the top amount from £40,000 to £10,000 available to top rate taxpayers. The IFS believe this would “affect a relatively small number of high-income individuals.”

Tax Credit/ Benefit Changes Osborne is expected to cut £12 billion in spending from the Welfare budget although this may not be at the pace once speculated. Child tax credits are projected to receive a major overhaul as these have been reported to have vast amounts of money incorrectly paid out.

More than seven million children will be affected by George Osborne’s proposed cuts to tax credits according to The Independent. Analysis from the Social Mobility and Child Commission found that any cut to tax credit could reduce the incomes of working families by 45 percent. With the vast majority of those affected earning less than £20,000 a year.

Two-thirds (4.9 million) of the 7.5 million families affected are working families. These figures will garner criticism as this affects “hard-working” families the Conservatives champion.

Many have joined a call to have Osborne cushion the blow of lower tax credits by urging corporations to pay a living wage. Some think tanks have argued that this may stall recovery. Some have argued that cuts to welfare should be proportionally distributed across the population.

Supporters of the Conservatives policies have said that the cap on aid a family can receive will not affect working families, only workless ones.

The Independent also reported there is a potential for Osborne to speed up the personal tax credit from £10,600 to £ 12,500 that was proposed in the Conservatives manifesto.

While many of this is uncertain one thing that is known is those who earn £30,000 (£40,000 if they live in London) living in social housing will be expected to pay market rent rather than receiving a subsidy.

“It's a simple matter of fairness. The welfare system I want to see is one that helps people to get good jobs instead of giving them handouts." Osborne wrote in The Sun.