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EY: dividend tax and tax free lump-sum in chancellor's Budget sights

The accountancy firm believes we could see a rise in the dividend tax rate as it outlines its predictions for this month's Budget.

'This Budget, as the first one of a parliament, would normally be expected to be full of bold moves, where the chancellor builds a war chest to utilise later in the parliament,' writes EY head of tax policy Chris Sanger.   

'However, in this case, with a minority government, and business and citizens struggling to understand what the future of the UK will be following Brexit, the chancellor may seek to buck this particular trend.' 

With this in mind, the EY team reveals its predictions for this month's Budget...

 

'This Budget, as the first one of a parliament, would normally be expected to be full of bold moves, where the chancellor builds a war chest to utilise later in the parliament,' writes EY head of tax policy Chris Sanger.   

'However, in this case, with a minority government, and business and citizens struggling to understand what the future of the UK will be following Brexit, the chancellor may seek to buck this particular trend.' 

With this in mind, the EY team reveals its predictions for this month's Budget...

 

Like it or lump it?

'While pensions seems to be an area of constant tax reform, the 25% lump sum has so far escaped change,' said Jason Whyte, associate partner of life & pensions at EY.

'Any such change is likely to keep the lump sum for all past contributions, and hence the benefit of any change would only benefit future chancellors rather than this government.

'However, if the chancellor wants to leave his mark, he might try to restrict the lump sum, knowing that future chancellors will thank him, even if taxpayers don’t.' 

 

Annual allowance cutback

Whyte also suggested that pension tax relief, worth £40 billion a year, could be a target for Hammond. 

 

'A further reduction in the annual allowance has been mooted, but the more likely target is bringing the start of the annual allowance taper forward from earnings of £150,000 per annum to £120,000.'

 

Paying dividends

Self-employed workers have presented something of a headache for the government, be it dealing with auto-enrolment or national insurance contributions.

EY's experts predicted this could once again prove tricky for the chancellor.

'Bruised from the abandonment of the increase in national insurance on the self-employed at the last Budget, the chancellor might be more cautious this time,' said Sanger.

However, one area that advisers will be keeping an eye on could be hit: dividend tax rates. 

'Another tax increase under contemplation could be an increase in the dividend tax rate.  While we saw a reduction in the allowance in the last Budget, the tax was introduced to offset the benefit of working through a company but the rate was not increased when the corporation tax rate was reduced.' 

 

Fair game?

Reports have suggested that the chancellor might use personal tax changes to win over young voters. 

David Kilshaw, private client services partner at EY, said: 'One of the key themes is “intergenerational fairness” so this may prove to be a “see-saw” Budget. Typically chancellors have used tax breaks to help the elderly, but this time the break may tilt towards the “new” or “next” generation.

'The chancellor could chose to do this in a number of ways. First, we could see the re-introduction of an “age-allowance” but instead of this being directed at the over 65s it could be for the under 30s. The allowance could taper away as income rises.

'In the alternative scenario, he may choose to readjust national insurance contributions for those under 30.' 

 

All calm on the tax change front?

Jeff Soar, UK head of financial services tax at EY, said that financial services companies are sick of tax changes so will welcome no changes.

'The financial services sector has dealt with major tax reform in almost every Budget for the last few years, so will be hoping that this time they are spared any big announcements. With the ongoing market uncertainty Brexit has brought, a period of calm on the tax front would be welcome,' he said. 

'One of the biggest concerns to the industry is that the corporation tax cut to 17% from 2020 could be reversed. Given it was legislated for in the Finance Act 2016, it would cause considerable upheaval and cost to unpick, and would be an unwelcome move that would see companies having to recalculate their deferred tax provisions, and would likely end up hitting their bottom lines.' 

Neil Harrison, UK banking and capital markets tax leader at EY, highlighted one area where some companies do want change: 'The new rules on interest restrictions and loss relief represent substantial changes to the UK’s corporation tax code and, more importantly, increase the compliance obligations of business. It means that companies are grappling with very complicated calculations for how much interest they can deduct from their profits.

'We hope the chancellor will give these changes time to bed in before launching any more major changes. The UK needs a stable and straightforward tax environment now more than ever to ensure business prosperity.' 

Business tax

'With all the uncertainty, whether from the delayed implementation of the post-election Finance Bill, the complexity of the legislation being introduced to deliver on the G20/OECD Base Erosion and Profit Shifting (“BEPS”) project, or just Brexit, businesses are looking for some stability,' Sanger said.

'We can expect the chancellor to update on the Business Tax Roadmap, this time perhaps adding a bit more detail to how he wants the tax system to look at the end of the five year parliament.

'With the focus on productivity, the Budget might include some incentives for investing in capital, with increases in the rates of capital allowances or the Annual Investment Allowance (potentially reversing the recent reduction in the annual investment allowance from £500,000 to £200,000, providing the relief up front, something that is included in the latest plans for tax reform in the US). 

'More substantively, we could see a systematic review of the incentives that the tax system creates towards investment, which could give rise to restoring relief for spending on industrial buildings and potentially going further.'

Tax traps

'There has been recent press coverage on three bands – removal of child benefit, removal of personal allowance and higher rate restriction on pensions,' said EY.

'Notwithstanding the press coverage, these are deliberate recaptures and the last two in particular hit high(er) earners so don’t expect action here.' 

Non-resident landlords 

'Non-resident corporate landlords are likely to be brought within the scope of UK corporation tax (rather than income tax) in order for the government to be able to apply certain corporation tax-only rules to such entities,' EY concluded.

'These rules include restrictions on loss relief, interest deductions and loan relationships.'   

Asset Management wish list

Gill Lofts, UK leader for wealth and asset management at EY, set out what asset managers want from the Budget as the EU's markets in financial instruments directive (Mifid ) is set to come in.

'UK asset managers are currently facing a number of challenges – namely how they continue to service European clients amid uncertainty over delegation rights and the need for EU entities to fulfil Mifid II and Ucits responsibilities.

'The industry welcomes the recent establishment of a new investment management task force and it looks forward to seeing the positive impact that this will create. There are also a number of other initiatives it would like to see in the Budget to help boost international competitiveness.

'Firstly, asset managers will be keen that the Treasury reaffirms its commitment to the 17% corporation tax in 2020, to make it as easy as possible for international investors to do business with the UK.

'They would also like to see an announcement on the practical steps for allocation of the apprenticeship levy. Replenishing the skills required to maintain and build on the UK’s position as a globally leading investment hub will be key to its continued success.'

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