Autumn Budget 2017: Pensions, self-employed, corporation tax

Chancellor Philip Hammond will be delivering his first Autumn Budget on Wednesday 22 November, amidst a climate of uncertainty compounded by stalled Brexit negotiations, and a rumour mill churning over calls to have the Chancellor removed.

In response, the Chancellor is reportedly planning a “bold” budget, particularly aiming to draw younger voters to the Conservative party by addressing “intergenerational fairness”, with reforms relating to student loans and stamp duty tax.

James Hender, partner and head of the private wealth group at Saffery Champness, said: “This is perhaps one of the most politically-charged Budgets of recent years.”

Another potential area to be targeted for reform are taxes relating to the self-employed, following the publication of the Taylor Review earlier this year.

“If Phillip Hammond is as bold as some have called for him to be, the implications of this political move on taxpayers could be significant”, Hender added.

So what can we expect from the Budget?

Pensions

“Pensions seem to be in the Budget cross-hairs yet again”, Lucy Brennan, partner in the private wealth group at Saffery Champness, commented.

The government pledged to maintain the state pension triple lock earlier this year, and under the current system pensions rise is linked to inflation or earnings, whichever is higher, at a rate of 2.5%. This maintenance means that it is possible the Chancellor will target pensions relief in this budget.

Relief is linked with an individual’s income tax rate, and currently higher rate tax payers get relief at 40%, while those on the basic rate receive relief at 20%.

According to TaxAssist Accountants, the Chancellor may be considering moving to an overall flat rate of 33%, “a change that would hit middle income professionals hardest.” Other reports suggest Hammond is considering a flat rate of 20% for all.

Brennan, on the other hand, is more optimistic that pensions tax relief is safe. She commented: “While slashing pensions relief has been mooted as a potential route to financing a cut to NIC for younger earners, it is difficult to see whether the government actually has the ability, and political will, to roll out significant reform.”

Brennan added that one potential option is “a cut to the fairly generous carry-forward system” but added that this would be high-risk and low-reward for the exchequer, as it may risk alienating the Conservative’s core demographic for minor fiscal gain.

Pensions for the self-employed

Following the publication of the Taylor Review, the government has been urged to pay heed to those out of traditional employment, such as contractors and the self-employed.

A study by the Financial Conduct Authority revealed that almost a third of UK adults have no pension provision and will have to entirely rely on state pensions, partly due to the rise of adults out of traditional employment to whom auto-enrollment doesn’t apply.

The Taylor review recommended auto-enrollment into pension schemes for the self-employed through self-assessment. Under this system, the automatic pension scheme would acquire 4% of a contractor’s income, unless they chose to opt out. The budget will reveal whether the Chancellor has taken this advice.

Self-employed National Insurance contributions (NICs)

The Chancellor’s Spring Budget infamously contained a controversial measure to increase Class 4 NICs from 9% to 11% by 2019, which the government walked back on following public backlash.

However, NICs are once again in the spotlight, with the OECD calling on the exchequer to revive the proposal to: “improve fairness in tax policy and reduce risks for the financing of the social insurance system.”

At the time of the U-turn, KPMG commented the Chancellor’s reversal would leave a “£2bn hole to fill over the next five years”.

Corporation tax

In the 2016 Budget, the government pledged to reduce the corporation tax rate from the current rate of 20% to 17% by 2020.

Hender commented: “The government is arguably stuck between a rock and a hard place on corporation tax.” He elaborated that the government needs to strike a balance between “ensuring the UK demonstrates that it is open for global business, and being publicly seen to tackle any perception of big business not paying its way.”

In its latest economic survey, the OECD commented that this reduction in the corporate tax rate would “broaden the gap between the taxation of capital and labour, which could reduce inclusiveness.”

The OECD added that according to a Deloitte report, the impact of Brexit and weak demand in the UK are top risk factors for respectively 60% and 57% of businesses. It said: “In this context, the impact of the CIT rate cut on investment and supporting demand might be lower than previously anticipated. “

The organisation also said cutting the corporate tax rate would cost £4bn that could be better directed elsewhere, and “public spending on hard and social infrastructure could be considered instead to support demand in the short term and to enhance potential growth in the longer term.”

Conclusion

The pressure is on for the Chancellor to deliver a bold and transformative Budget. Despite this, Hender said any bold plans will have to be tempered by stagnating productivity and OBR forecasts, which have “eaten into the £26bn headroom the Chancellor thought he had.”

He added: “Though the expectation may be that Mr Hammond will spend to win some political capital, any tax gift will come at a price, and is likely to be subsidised at someone else’s expense.”