Budget tax reform a hint of changes to come

That money has to come from taxes - and despite Philip Hammond's Spring Budget being a slimline 69 pages long (compared with former chancellor George Osborne, whose Budgets stretched into 100s of pages), the majority of it was occupied with taxation.

There were cuts to reliefs available and increases in other areas, as the Chancellor announced: "Just as a strong economy requires a tax system that is competitive, a strong society requires one which is fair."

He justified what would become some contentious tax takes - especially the rise in Class 4 national insurance contributions (Nics) which he eventually had to overturn a week later - saying, "Because I have committed to funding my spending decisions in this Budget, rather than borrowing more I make no apology for raising additional revenues, and for doing so in ways which enhance the fairness of the system".

National insurance u-turn

The most contentious tax take - as mentioned above - was the hike in Class 4 Nics for the self-employed - and after a huge political outcry against it, on Wednesday 15 March, Mr Hammond was forced to back down.

In a letter to Tory MPs, he said: "There will be no increases in rates in this Parliament." 

This could indicate a direction of travel which will be followed by the ongoing review of the tax status of the self-employed. Jim Meakin

The original plan, as stated in the Budget, was for a hike that would have seen self-employed workers face a Nics rise by 1 per cent to 10 per cent in April 2018, with a further 1 per cent for April 2019.

This would have affected more than 4.6m people in the UK - the current figure provided by the Office for National Statistics as to the number of self-employed people in the UK.

Some commentators described this as "fair", considering that as self-employed people will now have the same level of pension contribution, then they need to be paying more of their dues.

According to Sue Moore, technical director at the Institute of Chartered Accountants in England and Wales, the Budget changes to national insurance contributions have "helped to make the tax differential fairer between the self-employed and employed, although there is further to go".

The self-employed, either as a sole trader or as a partner pay tax on all their profits regardless of whether they draw them out of the business and pay class 4 national insurance (NI) at 9 per cent on profits between £8,060 and £43,000 and at 2 per cent on profits over £43,000.

By contrast, employees pay class 1 NI on earnings between £8,060 and £43,000 at 2 per cent on earnings over £43,000. The self-employed also currently pay flat rate class 2 NI of £145.60pa.

But the measure had been met with overwhelming consternation by others, including dozens of Tory backbenchers and by former pensions minister Baroness Ros Altmann, for the government reneging on a promise not to increase Nics or burden small business owners.

As Ms Altmann states: "The self-employed are bearing the brunt of tax rises to pay for other measures."

However, the self-employed may not be out of the woods yet, as Jim Meakin, RSM’s head of tax comments: "This could indicate a direction of travel which will be followed by the ongoing review of the tax status of the self-employed, who are seen by HM Revenue and Customs as obtaining unfair tax benefits over employees."

The government will still press ahead with the abolition of class 2 Nics in an effort to clean up the complicated tax system.

Dividend allowance 

The chancellor also slashed the tax-free dividend allowance - which is on top of the annual personal allowance  - from £5,000 to £2,000, effective from April 2018. He cited as his rationale for this: "The dividend allowance has increased the tax advantage of incorporation.

"It is also an extremely generous tax break for investors with substantial share portfolios. I have decided therefore to address the unfairness around director/shareholders' tax advantage and raise some much-needed revenue to fund the measures [announced in the Budget]."

A reform of national insurance might seem fair to the chancellor, but it’s likely to be viewed differently by rather a lot of others. Rosie Bullard

However, according to Rosie Bullard, investment manager at James Hambro & Partners: "This represents a further attack on the practice of business owners paying themselves the bulk of their income through dividends to avoid having to pay NICs.

"Again, it might sound fair, but those many entrepreneurs who find themselves paying corporation tax, NICs for employees and income tax – traditional Conservative voters perhaps – may take a different view."

It is likely to affect retail investors, too, namely those with dividend earning assets outside of tax wrappers like pensions and Isas.

Ms Bullard adds: "It should be noted the proposed increases to personal allowances (£11,500) and annual Isa limits (£20,000) will still go ahead in April and investors affected by the proposed dividend allowance reduction should take advice to make the most of their allowances ­– and those of any spouse."

Death tax

Another measure which has been contested hotly by Conservative backbenchers and industry players alike is the so-called 'Death Tax'.

This was Mr Hammond's hike in probate fees, which is being introduced in May 2017, and which was snuck out into the public domain on 28 February this year when the government's website and probate fees form (PA3) were found to have been updated to reflect the rise in fees.

While it was not mentioned in the Budget speech, it was put into the accompanying documents. 

Under the changes, the first rate fee of £215 (or £155 if using a solicitor) will change to one tiered based on assets. Lower value estates are exempt from any charge, but any estates over £50,000 will increase.

Estates with assets of more than £1m will have to pay probate fees between £8,000 and £20,000 - and given the average house price is more than £325,000, this could affect many people in Britain.

Gordon Andrews, financial planning expert for Old Mutual Wealth, comments: "At its crudest, one could argue this is yet another stealth tax being levied by the government, which could add up to 1 per cent in fees on the value of an estate."

Other allowances/cuts

The chancellor confirmed that the personal tax allowances would rise from £11,500 in 2017/2018 to its target level of £12,500 by 2020.

However, former pensions minister Steve Webb, director of policy at Royal London, comments: "Half a million low-paid workers could end up missing out on tax relief on their workplace pension contributions."

This is because the earnings trigger for automatic enrolment is £10,000, but this is less than the planned income tax threshold. When the rise to £12,500 happens, Mr Webb warned that up to half a million people could be caught in the trap unless their workplace pension scheme taxes the money at source, rather than using a 'net pay arrangement system'.

He explains: "If a low-paid worker wants to put £100 into a pension, it will cost them £80 if they get standard rate tax relief, but the full £100 if they do not.

"This all depends on the lottery of whether their employer has chosen a scheme which offers tax relief at source, rather than using the net pay arrangement."

Elsewhere in the Budget, the chancellor confirmed the annual allowance for Isas would rise to £20,000, as first mooted by his predecessor, George Osborne, and confirmed the Lifetime Isa launch this April, whereby individuals saving £4,000 a year can earn up to £1,000 bonus a year on these contributions.

The government is also set to amend the master trust pension scheme tax registration process. 

For a quick snapshot of the various allowance increases, here's a handy table:  

There was some respite in business rates and property tax rates, but as Mr Meakin comments: "As expected the chancellor announced some respite for small businesses who are due to be hit with the highest rises in business rates, with a specific protection for pubs.

"However, the measures to lighten the load are being received as something of a sticking plaster rather than a fundamental immediate reform."

Insurance premium tax

Protection providers and advisers have also lambasted the government for picking on insurance premium tax (IPT) as "low-hanging fruit".

According to Stuart Scullion, chairman of the Association of Medical Insurance Intermediaries: "HM Treasury has viewed IPT as low hanging fruit for generating revenue, with three increases in the last two years."

Mr Scullion says: "Increases in IPT affect the NHS as much as the private health sector. With the taxman taking an additional £120 in IPT for every £1,000 premium charged, it is no wonder some buyers of health insurance and health cash plans are saying 'enough is enough', cancelling their PMI and relying on an already overstretched NHS."

Also accompanying the Budget documents was a Treasury missive outlining IPT anti-forestalling measures put in place by the government.

Avoidance, evasion and administration

No tax round-up would be complete without some reference to avoidance and evasion. In the Budget documents, HM Treasury pledged to legislate for more than 35 measures to tackle avoidance. 

This builds on the previous parliament's progress during which more than 40 changes to tax law were made.

According to HM Revenue & Customs, more than £140bn in additional tax revenue has been generated through tackling avoidance, evasion and non-compliance. 

In this Budget, Mr Hammond announced new legislation to crack down on promoters of tax avoidance schemes, and introducing a 25 per cent charge on transfers to qualifying recognised overseas pension scheme (Qrops).

This was to tighten up on those people seeking to reduce the amount of tax they needed to pay by moving their pension wealth to another jurisdiction - despite most of these jurisdictions having pre-existing tax agreements in place with the UK. 

This does not apply to transfers where the individual and the pension are both within the European Economic Area.

The ability of companies to convert capital losses into trading losses was also removed with immediate effect from the day of the Budget (8 March).

simoney.kyriakou@ft.com