Sarah Coles, head of personal finance, Hargreaves Lansdown: “With changes to major taxes like VAT and the rates of income tax and National Insurance off the table in the Budget, there’s a chance we’re heading for multiple tweaks in an effort to make ends meet at the Treasury. As so many Chancellors have discovered in the past, the risk is that some of them come with unexpected side-effects.
Changing tax rules will often persuade people to change their behaviour in a way that the Chancellor didn’t foresee. One of the most dramatic in recent years was the mini-Budget, which offered £45 billion of unfunded tax cuts, without the scrutiny of the OBR. The end result was the pound falling to record lows against the dollar, gilt yields spiking, the price of mortgages ramping up spectacularly, the cost of government borrowing soaring and a threat to the stability of UK pension funds. Most of the measures were subsequently reversed, but the damage was done
But this wasn’t the only consequence. When Gordon Brown abolished the dividend tax credit on pension investments, for example, it was understood this would mean pensioners lose 20p in every pound of dividend income, but what was less well understood was the lost incentive to invest in British companies producing dividends – which helped cut the proportion of institutional investors in UK-quoted shares from around half to 4%.
George Osborne, meanwhile, brought in the Help-to-Buy equity loan scheme, to help support buyers trying to purchase a newbuild. A House of Lords report found it had inflated the cost of these properties – and in more expensive areas, rising prices had undone the benefits of the scheme. He was also tripped up in an effort to increase a tax on rotisserie chickens in supermarkets – which he didn’t realise would affect pasties and sausage rolls. The pasty tax was one of the speedier U-turns in recent Budgets.
10 possible unintended consequences of rumoured potential Budget moves
1. Increasing capital gains tax on stocks and shares could encourage investors to hoard assets. They could end up holding investments that don’t suit their needs, leading to worse outcomes.
2. Increasing capital gains tax on stocks and shares could put people off investing, damaging their financial resilience and making it more difficult for businesses to attract vital investment.
3. Increasing capital gains tax on property could persuade investors to hang onto property – waiting until this tax resets to zero on death - clogging up the property market and making it more difficult for people to move.
4. Introducing a sales tax on more expensive properties – or capital gains tax on pricier properties - could stop people downsizing later in life. It could seriously dent their retirement resources, and gum up the works of the property market.
5. Raising dividend tax rates could put people off investing for income – especially in the UK market, which is home to a number of rewarding dividend-producing companies. This would fly in the face of the government’s ambitions to promote an investment culture in the UK
6. Cutting gifting allowances for inheritance tax, capping lifetime gifts or removing taper relief could persuade people not to give lifetime gifts to their family that they really need.
7. Making changes that expose more people to inheritance tax could persuade people to give money away too early in life, so they can’t pay for care, creating a financial headache for their family.
8. Cutting tax relief on pension contributions could mean higher earners in particular put less aside for the future, so they face horrible compromises in retirement.
9. Cutting tax relief on pension contributions for higher earners would mean it protects less effectively against the 60% tax rate when they earn £100,000. It could tip the balance for some to consider working less instead.
10. Even if it never materialises, the threat of cutting tax-free cash on pensions could encourage people to take more cash than they need ahead of the changes, severely damaging their retirement income.”
What you can do ahead of the Budget to protect your finances
1. Make a pension or SIPP contribution
2. Pay into an ISA
3. Take out a Junior Isa for a child
4. Use share exchange (Bed and ISA) for existing investments
5. Use your CGT allowance on share gains
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