Chancellor George Osborne will be presenting his fifth budget on 19 March - and with an election just around the corner it could be the most politicised yet.
What can Osborne do to help out families in the ‘squeezed middle’, how much support will he be willing to offer those on the lower rungs of the income ladder, and how will he balance these imperatives against a desire to continue to encourage entrepreneurship and business?
One measure that could curry favour among younger voters and that seems to be gaining ground among many is to reduce the tax burden for prospective homeowners by either upping the stamp duty thresholds or tinkering with the machinations of the tax.
The London Central Portfolio has proposed the government ups the 1 per cent stamp duty ceiling from £250,000, arguing there is “clear evidence” that the step up in stamp duty at £250,000 has “suppressed price growth and normal transaction flow”.
The case is compelling: the threshold where the tax rate triples from 1 per cent to 3 per cent has remained unchanged for over 15 years despite the fact that house prices have more than tripled in this period from £79,242 to £247,549, according to LCP.
Economists at think-tank Capital Economics agreed the ceiling needs to be raised - they proposed upping it to £300,000 - but added that it supports a more radical change to the stamp duty system to make it a marginal tax in line with the way income taxes are collected.
In fact, both the Association of Certified Chartered Accountants and Zoopla have echoed this call to remove ‘cliff-edge’ thresholds that distort the market, forcing sellers to settle for less and creating ‘dead-zones’ just above the band limits.
Such a move would decrease the tax on a £250,001 from £7,500 to £2,500. The question is, would the marginally higher valuations and overall sales increase many predict would ensue cover the direct drop in tax-take.
If not, Mr Osborne may shy away from a costly tax cut to a sector that is already getting help through the (now-extended) Help to Buy schemes.
Another personal tax rise?
The chancellor has used every one of his Budgets to raise the income tax personal allowance, in what was first pitched as coalition compromise and is now a policy both the Conservatives and Liberal Democrats are keen to ‘own’.
The government has as good as said it will use Wednesday’s Budget to “reward hardworking people” by upping the allowance to £10,500 - the question is now will he do as he has before and drag more people into the 40 per cent tax band to pay for the move?
The 40p rate currently applies to anyone earning over £41,450 and this is set to rise by just 1 per cent to £41,865 next month.
A compromise measure could see below-inflation increases to continue, but even this could prove controversial among Tories as new data shows six times as many people are caught in the tax band designed for higher earners as were in 1978.
Capital Economics says senior Tories have been campaigning for this rate to be increased to £44,000 to help ease the strain on the middle-squeezed.
The think-tank says the chancellor could potentially meet them “roughly half-way” and raise the threshold in line with inflation to around £43,000. This would cost the Treasury about £500m, Capital Economics says.
LTA pleas
In December’s Autumn Statement, the chancellor made minimal changes to pensions. Bear in mind, this government has been fairly pro-active in the pension sphere by introducing a flat-rate state pension and auto-enrolment. Surely the chancellor will continue to leave pensions alone as these policies still need time to bed in.
However, commentators believe the government needs to make a couple of amendments.
In April, the new lifetime annual allowance of £1.25m kicks in and there are worries that the chancellor could continue to curtail future increases in this or even cut this even further.
Andy James, head of retirement planning at Towry, says that with current annuity rates, a £1.25m pension fund would only initially provide an individual with around £40,000 per year in terms of a rising retirement income.
Further cutting the lifetime allowance seems to smack in the face of what the government is trying to achieve.
We have auto-enrolment which will hopefully boost people’s pension savings but if there is a limit on how much can be saved, will this end up dissuading people and causing them to fall back on the state when the time comes? The country can hardly afford that.
Hargreaves wants to see a commitment to raise the lifetime allowance in future on an annual basis, “otherwise you might just as well tell the 30 some-things of today not to bother with pensions at all because they’ll be subject to 55 per cent tax by the time they get to retirement”.
Trivial commutation
Hargreaves has been campaigning to persuade the Treasury to allow pension investors with small pension pots to have their money back rather than being forced to buy a “poor value annuity”.
Most expect some action on the current trivial commutation threshold of £18,000, but the question is how low will it go. Most suggest £10,000, but there are calls for it to be set even lower still - according to Hargreaves a £5,000 pension pot will buy an income of around £5 a week.
Mr McPhail says: “Reforming the small pots rule will help to unlock improvements right across the pension system.
“Small investors will get their money back; insurers will be able to sell better value annuities to large customers; it will help to minimise auto-enrolment opt-outs and it’ll push cash out into the economy.”
