This Wednesday (22 November) Chancellor Philip Hammond will deliver the Budget amid calls for bold action on rebalancing opportunities for younger generations.
It marks the first Autumn Budget following March’s last ever Spring Budget. There will now be a Spring Statement from 2018 onwards in place of November’s traditional Autumn Statement.
The delivery of this week’s Budget comes at a tricky time for the government, with Brexit talks mired in Brussels and a wafer-thin majority in the Commons.
John Gunn, executive chairman at Synergis Capital explains: “The first Budget after an election normally is the time to get the unpopular measures out of the way. According to the Institute for Fiscal Studies, each of the five elections prior to the 2015 election saw net tax rises of more than £5 billion in today’s terms. But this is not a normal Westminster cycle, given the distraction of Brexit and post-election inquest still shadowing the Government.”
With the calamity of June’s general election for the Conservatives, young voters appear to be very much in the Chancellor’s crosshairs. The failure of the Tory party to win over millennials is much cited as the reason for the failure to secure a majority. However, the predicted changes would have implications for young and old alike.
Rebecca O’Keeffe, head of investing at Interactive Investor – Moneywise’s parent company – says: Deteriorating economic forecasts and tight public finances make Chancellor Philip Hammond’s budget on Wednesday very difficult – and that’s before you factor in the opposing vested interests and continued conflict within the Conservative party. With limited room to manoeuvre, the risks for different sectors are biased towards the downside, but housebuilding looks like it will come out on top, as more and more focus is given to the unfair generational divide which is leaving younger people with far less financial security than their parents and grandparents.”
Prediction 1: Stamp duty reform for first-time buyers and downsizers
With the Conservative party craving the attention of young voters, stamp duty reform is the odds-on favourite for legislative action. Current levels of home ownership are at their lowest levels in decades, according to the Department for Communities and Local Government (DCLG) and the problem is attributed to the high barrier to access to the market for first time buyers.
Experts say a change to stamp duty could come either in the form of a ‘tax holiday’ for first time buyers, or a cut for ‘downsizers’. Cutting stamp duty at the top end of the market would encourage older homeowners to downsize, freeing up space elsewhere for families with children and first time buyers.
Mark Stephen, founder of Reditum Capital explains: “A combination of soaring house prices, housing shortages and planning permission potholes have caused conditioned problems with the availability and cost of finance for buyers, developers and investors. Together, these issues continue to ruin the chances of an improved UK housing climate.
“Exemptions to stamp duty for first time buyers in countries like Australia were successful in doubling the number of these buyers recently and the Chancellor may be tempted to follow suit. It would also not be surprising if the government were to reduce or even remove stamp duty for older homeowners altogether. This could encourage downsizing and provide additional housing stock to the market of younger families."
However, Daniel Hegarty, chief executive and founder of digital mortgage broker Habito is pessimistic of this proposal. He adds: “We all know that the property market is broken. To even the playing field between young renters and older home-owners, we need more than a cut in stamp duty.
“While axing stamp duty will unblock a stagnant housing market in London, for millions of young people trapped renting in the rest of the UK, it will offer little relief. Outside London, removing the tax will save the average first-time buyer less than £1,000, which is just a drop in the ocean when the average deposit is £49,639.”
Prediction 2: Buy to let mortgage interest tax relief to be scrapped for companies
One of the more controversial Budget decisions of Mr Hammond’s predecessor included a major reduction on the tax relief buy to let investors can benefit from and the introduction of a 3% surcharge on stamp duty for buy to let properties.
Toby Ryland, corporate tax partner at the chartered accountants HW Fisher & Company thinks the Chancellor will further tighten buy to let rules: "Buy to let property investors have been feeling the pinch since April this year, when the government reduced the tax relief they can claim on their mortgage interest payments.
"This tax relief is set to be reduced even further in coming years, but at present the cuts only affect investors who own the properties directly. There’s an exemption for properties that are owned by a company, which has prompted many buy-to-let investors to set up their own companies through which they hold and manage their properties - thus maintaining the previous rate of tax relief on their mortgage payments.
"It’s now possible Mr Hammond will close - or at least tighten - this loophole by taking mortgage interest tax relief away from companies as well, thereby preventing professional landlords enjoying a tax relief that individual investors do not."
Prediction 3: Pension tax relief to rise for younger savers and cuts to pension allowances
Another key area where the Chancellor is touted to tinker is pension tax relief. Like with stamp duty, it would appear that Mr Hammond might target improvements for young people at the expense of older generations.
Matthew Rankine, director of sales at the pension provider Liberty SIPP, comments: “The Treasury is reportedly planning to increase the pension tax relief offered to younger savers, a giveaway that might be funded by reducing the tax relied offered to older savers.”
However, Mr Rankine believes this will have little impact if young workers don’t feel able to spare a portion of their wages: "If they [young people] don’t have the spare cash in the first place, offering them extra tax relief will do little to nudge them into saving for retirement. Conversely, those who have left it late to start a pension need all the help they can get."
Steve Webb, director of policy at Royal London (and former pensions minister during the Coalition government) has some insight into how this added relief for younger savers might be paid for: “I think the best guess is that we will see further ‘salami slicing’ of pension tax relief. Tax relief is an area the government has raided repeatedly and yet the cost continues to grow so they will feel there is more to go for.
“The most likely cut is in the annual allowance [currently £40,000], which will be justified on the basis that the annual allowance for Isas [currently £20,000] has been raised substantially in recent years. We could also see cuts to the tapered annual allowance [currently for every £2 your income goes over £150,000, your annual allowance for that year drops by £1 down to a minimum tapered annual allowance of £10,000] and the lifetime allowance [currently £1 million]. But I don’t foresee reductions to ‘tax free cash’ as this would be politically unsaleable.”
Prediction 4: Tax-free pension withdrawals to be capped at £100k
Sean McCann, chartered financial planner at NFU Mutual believes that the amount over-55s can take out of their pension will be capped. He says: “Currently 25% of a pension can be taken as a tax-free lump sum, it is strongly rumoured that this will be reduced to £100,000 per person.
“Capping the amount of tax free cash that can be taken from pensions would claw back some much-needed tax for the Treasury. Setting it at £100,000 would mean those with pension savings greater than £400,000 would be affected’.
Prediction 5: Tax-free dividend allowance to fall
Investors may see the resurrection of a previously announced policy that was dropped in the wake of June’s election.
In his Spring Budget, the Chancellor announced plans to reduce the tax-free dividend allowance from £5,000 to £2,000 from April next year. Dividend earnings over £5,000 are currently taxed at 7.5% for basic-rate tax payers, 32.5% for higher rate tax payers, and 38.1% for additional rate payers.
This proposal was reintroduced into the Finance Bill in September, but Mia Kahrimanovic, senior financial planner at Charles Stanley, thinks the Chancellor might go even further and increase dividend tax rates or cut the tax-free allowance further.
Ms Kahrimanovic says: “The government has dropped this proposal once before and it would be good to see it do it again. We need to be encouraging savers, especially since interest rates are going to remain lower for longer, and this is not the way to do it.”