What will be in the Budget?

The Chancellor of the Exchequer will present the Budget on Monday 29 October 2018, against a backdrop of relatively favourable economic conditions but considerable uncertainty about the outcome of the Brexit negotiations.

Click here to read our review of the current fiscal landscape against which the Chancellor’s Budget decisions will be set, and here for a more detailed consideration of some of the Budget possibilities.

Given the secrecy that surrounds the Budget process, any predictions as to the measures that will be included must be speculative, but the following are some of the areas where the Chancellor may be considering making changes.

Income tax rates and allowances

Personal allowance and higher rate threshold. The Conservative manifesto for the 2017 General Election committed to increase the income tax personal allowance to £12,500, and to raise the higher-rate threshold to £50,000, by 2020. No doubt the Chancellor will want to use any available funds to move him well on the way towards these targets.

Starting rate. An alternative way to target support at those on lower incomes would be to introduce a ‘starting rate’ of income tax below the basic rate. This has been tried by previous governments but has been contentious and is perhaps unlikely to appeal to the Chancellor.

Withdrawal of personal allowances on income over £100,000. Those on the highest incomes do not have the benefit of any personal allowance, because this is progressively withdrawn where income exceeds £100,000. Arguably this threshold is due to be raised as it has remained unchanged since it was introduced in 2010/11. However, in practice any measures that could be billed as ‘tax cuts for the rich’ are unlikely to be included in the Budget.

Smoothing the rate structure. Progressive reductions in the basic rate have widened the gap between that rate and the higher rate, so that an individual’s marginal rate doubles when income exceeds £46,350. There is a case for some smoothing of the rate structure, with a multiplicity of rate bands. However, the Chancellor is unlikely to contemplate major structural changes to the system at a time when both ministers and civil servants are preoccupied with the implications of Brexit.

The 60% marginal rate. There is a highly anomalous effective marginal income tax rate of 60% that applies to taxable income between £100,000 and £123,700 because of the effect of the tapered withdrawal of personal allowances for taxpayers with income over £100,000. There is a strong case for amendment but, again, the technical nature of the issue and the relative wealth of those affected mean that this is unlikely to be the year that sees the anomaly removed.

The taxation of dividends

Increasing the dividend allowance. In 2016 the system for taxing dividends was changed dramatically, so that dividends that were previously completely exempt from tax in the hands of basic-rate taxpayers became taxable at 7.5% to the extent that they exceed a dividend allowance of £5,000. This allowance was reduced to £2,000 in 2018. There is a good argument for a higher figure, not least for administrative reasons, but the Chancellor is perhaps unlikely to reverse the reduction quite so soon.

Inheritance tax

Consolidating the minor allowances. The detailed inheritance tax rules include a number of small allowances for lifetime transfers, with the result that those transfers are exempt even if the donor dies within seven years. These are an annual exemption of £3,000; a small gifts exemption of £250; and exemptions for gifts on marriage which may be £1,000, £2,500 or £5,000 depending on the circumstances. These limits have remained unchanged for many years, and there has been some speculation that the Chancellor intends to replace them with a single exemption of £10,000.

The corporation tax rate

Reduction to 17%. In 2016 the Government declared its intention of reducing the rate of corporation tax to 17% in 2020. The 2017 Conservative manifesto indicated that ‘we will stick to that plan, because it will help to bring huge investment and many thousands of jobs to the UK’. We may therefore expect to see this reduction confirmed in the Budget.

The digital economy

A digital services tax. In the Chancellor’s speech at the Conservative Party conference he said: "We … have led the debate on reforming the international tax system for the digital economy… insisting that the global internet giants must contribute fairly to funding our public services. … The best way to tax international companies is through international agreements, but the time for talking is coming to an end and the stalling has to stop. If we cannot reach agreement the UK will go it alone with a 'Digital Services Tax' of its own." This tax may therefore make its appearance in the Budget; or perhaps the Chancellor’s patience may last a little longer.

 

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