The Magic Money Tree

By Andrew Coles, Chartered Financial Planner, Beaufort Financial (Reading)

While the headlines in the political world are fully focused on Brexit and divisions in the two main political parties, we are fast approaching Phillip Hammond’s second Autumn budget.

The annual budget delivered by the Chancellor of the Exchequer is, in simple terms, the government setting out their spending plans for the coming year and beyond and how they intend to raise the capital to pay for it.

There has been some good news for the chancellor in recent months with government borrowing being lower than anticipated. Public sector net borrowing (excluding public sector banks) in the latest full financial year (April 2017 to March 2018) was £39.4 billion. That is £6.4 billion less than in the previous financial year (April 2016 to March 2017) and £5.8 billion less than official (Office for Budget Responsibility) expectations. However, with the continued worries and uncertainty around the Brexit deal and its implementation after that, the chancellor is keen to tighten the purse strings in preparation for the turbulent waters ahead.

We are now seeing a number of headlines in the news speculating about the potential ways in which Hammond could raise taxes without inducing the vast negative headlines which followed his ill-fated attempt to increase national insurance contributions a few years ago. This would suggest that more tinkering with pensions might be an easy target for Mr Hammond.

Sir Steve Webb, former Pensions Minister, was a speaker at our seminar last year and was clear that the government will be very limited in introducing new laws for the next few years since all the draftsmen will be busy rewriting the statute book for EU laws being repatriated into UK law.

Therefore, I would expect this to rule out any loss of higher rate tax relief on pensions as this would be an administrative burden and would cause outrage amongst voters.

It would appear that the most likely option for the chancellor is to reduce the annual allowance from £40,000 to £30,000, or even further to £20,000 if he is feeling really brave!

It is also a possible that the chancellor could reduce the starting point of the tapering of the annual allowance down from £150,000 annual income to £125,000.

Of course, it won’t be the first time that potential changes to pensions have been mooted and nothing has happened. I wonder if further reductions in the tax relief given by HMRC to higher earners (who are perceived as being able to afford it) might be a temptation too far.