Budget 2017: Here’s how the battle of the generations could unfold on Wednesday
National Insurance, Stamp Duty, Capital Gains Tax and pensions could all be in play
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Your support makes all the difference.Philip Hammond's proposed “theme” for his fiscal statement on Wednesday is: “A Budget for the Next Generation”.
That confirms this is the latest fusillade in the inter-generational economic warfare that has been raging for some time.
I am grateful to The Independent’s partners, Blick Rothenberg, for the insights and raw hard data here, though the analysis and views are mine and mine alone (as are any errors).
So here are some of the munitions that might be lobbed across the political battlefield on Wednesday.
First, some moves to make the young better off…
- The Chancellor could align the National Insurance Contributions 0 per cent band upper limit with the personal tax allowance, giving lower paid workers a small NIC saving, whilst simplifying the system. All well and good. But the Chancellor might be tempted to re-complicate matters and confine this particular tax/NIC cut to, say, workers under the age of 40. This would save the “young striver” (as they might be labelled) about £400 a year in national insurance contributions. But it would need to be funded, possibly by an increase in the 2 per cent NIC above £45,000, for example, to 3 per cent for individuals over 40. A fairly naked bit of age-related redistribution.
- Mr Hammond could take the opportunity to introduce a Stamp Duty “holiday” for first time buyers. He might also make this still substantial fee easier to bear for the younger home buyer by allowing them to pay the levy in instalments. Again, this is a tax cut disproportionately favouring the young.
- Already announced, the Chancellor will confirm that he will increase the threshold at which graduates start repaying their tuition fee loans from £21,000 to £25,000. It doesn’t amount to that much, about £20 a week. Labour say they’ll do more. But it’s better than the alternative – a freeze in the threshold which was talked about by some.
- We may well also see an “enhanced” personal allowance for people under 35 and whose earnings qualify for tax at the basic rate only. For example, someone who falls within this category would benefit from (say) a £1,000 additional personal allowance. This could be paid for by abolishing the marriage allowance which, according to Nimesh Shah of Blick Rothenberg, has had a very low take-up. The marriage allowance, while sounding politically attractive, is complicated and not worth much in real terms.
- A better move from Number 11 might be a consultation on teaching money management as a main subject in schools, including tuition in investment.
- Taking it a step further, Government could consider giving all young people a "bundle of lifetime tax credits" based on reliefs an average earner might enjoy (pensions, ISA, Help To Buy, etc.) and convert them into a capital sum each individual can flexibly redeem during their lifetime at age 28. For example, they could claim a £100,000 credit and choose to apply it to 100 per cent relief from SDLT, or for 100 per cent tax relief on the costs of setting up a first business etc. Each individual would then make an informed choice where to apply the tax credits based on their lifetime objectives. In most cases it will be "mix and match" which would make this system responsive and flexible.
And turning to the older tax payer…
- The Stamp Duty holiday could also be extended to those downsizing, their kids having “flown the nest”. Stamp Duty can still be considerable when buying another home, even if the new home is smaller and cheaper. So the Stamp Duty reduction could be extended at this end of the age range. Another problem to be fixed is that if the previous home is not sold before the second purchase a 3 per cent SDLT surcharge applies. Although this is refundable provided the first property is sold within three years, this creates a significant initial outlay and additional administrative burden and discourages older folk from downsizing.
- There has been some speculation that the Budget may look to restrict some of the reliefs available to investors (who tend to be older) under the Enterprise Investment Scheme (EIS). But the Chancellor should resist restricting EIS as this has acted as a significant incentive to wealthy investors who might wish to invest in start-up businesses and Alternative Investment Market (AIM) listed companies. The withdrawal or reduction of the relief could therefore make it harder for smaller groups to raise the finance necessary for growth and job creation, which would not be good for young job seekers.
- The Chancellor could drop a bombshell and increase the personal rate of Capital Gains Tax (for richer, usually older investors) on shares, bonds and property sales all the way up to 40 per cent. He might, though, keep the existing rates of 10 per cent and 20 per cent for business assets and “productive investment”, perhaps something that would help younger entrepreneurs.
- The Chancellor may further restrict the tax breaks on making pension contributions – again something geared towards the middle aged. Thus there could be some withdrawal of higher rate income tax relief on pension contributions from April 2018. This reduction could help fund the lifting of the public sector pay cap.
There will be much more of this in the coming years, and a great deal of soul-searching about the generation gap in wealth, earnings and opportunities. The slower the economy grows the more intense the pressures on public finances, and the more desperate the hand-to-hand combat will become.
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