What will be in this year’s Budget?
Further tweaks to pensions higher-rate tax relief and a clampdown on converting income into capital in order to pay less tax could also be announced on 24 March.
“A VAT rise must be top of the agenda, but perhaps not introduced until later in the year,” comments Richard Mannion, national tax director at Smith & Williamson. “Every 1% increase in VAT brings in just under £5 billion per year, making this a tempting option.
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The average rate of VAT in the European Union is almost 20%, and the UK has the third lowest standard rate of VAT.
However, the downside of raising VAT is that it could dampen consumer spending and would add to the already rising cost of living.
George Bull, head of tax at Baker Tilly, says the government should be too concerned about these negative impacts.
“We changed VAT twice in 13 months recently, and it actually wasn't too hard for the industry, and retailers and customers weren't too sensitive to it,” he explains. “I'm not sure we'll see VAT changed in next week's Budget, but it could be raised in the second Budget this year, after the general election.”
Bull predicts Darling will move the standard rate of VAT from 17.5% to 20%, while the reduced rate could rise from 5% to 8%.
The government might reduce the rate of VAT on selected goods and services, as a sweetener to any rises. Following the European Council's decision to allow more items in the reduced rate, France moved restaurant meals into its reduced VAT rate - but the UK has yet to make any moves.
Services like renovations and repair work could be moved into the lower rate, according to Bull. The UK building industry is already lobbying for such a move, saying it will create thousands of jobs for the sector.
Capital gains tax
A change in capital gains tax (CGT) is also widely tipped to be in Darling's red box. The rate of 18% looks at odds with the forthcoming top rate on income tax of 50% so there may be moves to raise CGT to help close up the gap.
Mannion believes CGT could even increase from the start of the new tax year on 6 April.
However, Bull is crossing his fingers that the Treasury doesn't go so far as to completely align CGT with the highest rate of income tax. “I hope we will not see a kneejerk response of CGT matching income tax. I hope it will just be a moderate increase.”
What he does see, however, is some anti-avoidance measures introduced to stop people converting income gains into capital.
“The 32% difference in CGT and income tax is huge, and if you can convert income into capital you're onto an absolute winner,” says Bull. “We haven't seen any anti-avoidance rules come in yet, but then the 50% income tax rate hasn't arrived yet. It's highly probable the Treasury will soon announce some rules.”
Mannion agrees there will be a renewed emphasis on rooting out tax avoidance, and we may see salary sacrifice schemes under the spotlight too.
Meanwhile, insurer and pension provider Skandia is concerned the government will go further in its restrictions on higher-rate tax relief on pensions.
It warns that the restrictions for those earning more than £130,000 may not be the final goal for phasing out higher-rate tax relief.
Colin Jelley, the firm's head of financial planning, says the next target could be incomes of more than £100,000 and higher-rate tax relief could eventually be banned. History shows that governments have previously restricted tax relieves to basic-rate taxpayers - for example mortgage interest relief and the married couples' allowance.
He recommends higher-rate taxpayers consider paying in maximum pension contributions before the Budget next Wednesday (25 March).
In terms of what savers and investors would like to see in the Budget, the restoration of dividend tax credits and raising the inheritance tax threshold to £1 million were the favourite changes according to a Brewin Dolphin poll of its clients.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.