What will be in the Budget? A giveaway to stoke a post-pandemic recovery

The Government is expected to follow up its successful vaccine programme with a feel-good giveaway Budget to stimulate an economic recovery from the pandemic. 

Chancellor Rishi Sunak is apparently prepared to help stoke a post-lockdown boom, and put off tax rises to pay the mammoth Covid-19 bill – at least for a while.

But we might find an open-handed Budget is followed by a more sober ‘Tax Day’, a newly-introduced date in the financial calendar scheduled for 23 March, when consultations on future tax raids could be revealed.

These might be trailed for implementation in a (hopefully) post-pandemic April 2022, giving the country plenty of time to think and argue over how the Treasury plans to replenish its coffers.

Below, we look at some of the key issues affecting Britons’ personal finances that could come up when Sunak delivers the Budget on Wednesday, 3 March.

Universal Credit

The Chancellor’s effort to axe the £20-a-week boost to Universal Credit in the Budget appears to have failed following a revolt from his own backbenchers.

The £20 ‘temporary’ uplift announced last year is now likely be extended for another 12 months, after the Government’s plan to end it in April ran into internal as well as Labour opposition.

The top-up, which adds more than £1,000 a year to the benefits of a single person aged 25 or over, could cost £6.4billion if prolonged on that timetable, according to the Joseph Rowntree Foundation.

Benefit boosts collectively cost the Treasury £8.3billion in 2020-21, while the price of the Universal Credit extension was described as ‘the equivalent of putting 1p on income tax and adding 5p a litre on fuel duty’ by Tory allies of the Chancellor. 

But MPs called for the Government to extend the uplift for at least a year to support benefit claimants, whose number has risen 109 per cent since last March. 

Pensions

The lifetime allowance, which is the total amount you can pay into a pension and still get tax relief, could be frozen at £1,073,100 for the rest of this parliament.

This move would affect higher earners who are still saving for retirement, particularly those in final salary pension schemes, like doctors and headteachers.

The ‘triple lock’ guaranteeing annual rises of at least 2.5 per cent in the state pension looks safe for now as Prime Minister Boris Johnson seems determined to stand by this election commitment.

Speculation about a raid on pension tax breaks for higher earners has surfaced again, but any plans seem more likely to be put out for consultation or simply delayed until later in the year.

Pensions tax relief allows everyone to save for retirement out of untaxed income, which means you get a bigger sweetener the more you earn.

Clawing billions of pounds from people’s future retirement savings might tempt the Chancellor, but it would be unpopular and extremely challenging to implement at a time when it still needs to engineer a recovery from the pandemic.

The 25 per cent tax-free pension lump sum is also probably too beloved and hard to reform to become a target, at least for now.

But Sunak might look at taxing inherited pensions left to anyone but a spouse.

At present, beneficiaries either pay no tax if the owner dies before age 75, or their normal income tax rate if they are 75 or over.

Sean McCann, of NFU Mutual, says: ‘Pensions normally escape the inheritance tax net, but the huge amounts of wealth held in pension funds may be a tempting target for the Treasury.

‘Inheritance tax is normally charged at 40 per cent but even a 10 per cent charge on pension funds not left to a spouse or civil partner would raise a significant amount.’

Investments

The Government’s tax officials drew up a blueprint last year to raise a ‘substantial’ amount from the wealthiest taxpayers with a capital gains tax overhaul that would hit stock market investments.

This floated hiking capital gain tax to income tax levels, and slashing the annual tax-free amount from £12,300 to as low as £2,000. 

Such measures would amount to a substantial raid on profits made from any investments held outside of an Isa or pension.

The move could see the tax rate on capital gains rocket from the current 20 per cent on investments such as shares and investment funds to 40 per cent for higher rate taxpayer. For basic rate taxpayers it would double from 10 per cent to 20 per cent.

The potential impact of CGT changes on second property and buy-to-let owners is looked at below.

Even if he doesn’t attempt to revamp CGT, the Chancellor could be minded to tinker with the dividend allowance, which is currently £2,000 a year.

Meanwhile, Sunak has reportedly rejected the idea of a one-off wealth tax on people with assets of more than £500,000 because it would be ‘un-Conservative’. 

Stamp duty: Waiver applies to the first £500,000 portion of a home’s purchase price.

Property

There has been widespread speculation that the Chancellor will extend the stamp duty holiday from March 31 to the middle of May or end of June.

This would allow any property sales agreed to complete, and save people up to £15,000 on their stamp duty bill.

Delays in the transaction pipeline may see some of these sales fall through if the stamp duty holiday is not extended.

The stamp duty waiver applies to the first £500,000 portion of a home’s purchase price. 

The Chancellor has also been looking at capital gains tax, something that could have a big impact on landlords and those with holiday homes. 

This is because the tax is levied on the gains made from the sale of buy-to-let properties and second homes. It is not currently levied on main residences.

Capital gains tax is traditionally taxed at lower levels than income tax. On the sale of second homes and buy-to-let properties, the rates stand at 18 per cent for basic rate taxpayers and 28 per cent for higher rate or additional rate taxpayers.

If an increase in capital gains tax was introduced to bring it into line with income tax, the rates on these types of second properties could rise to 20 per cent and 40 per cent, and 45 per cent for the highest earners.

Help for younger savers: Treasury could consider extending the reduction in the Lifetime Isa withdrawal penalty

Savings

Savers received little in last year’s Budget, and could be short changed again.

‘I suspect there will be nothing of interest to savers sadly,’ says James Blower, an industry analyst and founder of The Savings Guru.

That is unless the Treasury heeds the Labour Party’s call for a ‘British Recovery Bond’ to use Britain’s £125billion lockdown cash pile to finance investment after the pandemic. 

‘I thought they might launch a “coronavirus bond” at the beginning of all this, like they’ve done in the past after the wars,’ says Anna Bowes, co-founder of the analyst Savings Champion.

The Treasury could also consider extending the reduction in the Lifetime Isa withdrawal penalty from 25 per cent to 20 per cent, currently due to end in April, after a petition calling for it to be cut permanently received more than 16,000 signatures. 

The sole giveaway to savers in the 2020 Budget was an increase in the tax-free Junior Isa allowance from £4,368 to £9,000. Official figures which would show how much of an impact this had have yet to be released. 

VAT cut for hospitality

The Treasury’s temporary cut to VAT to help boost a hospitality and tourism sector heavily hit by the pandemic could be extended.

First announced last July, the reduction to 5 per cent, down from 20 per cent, had previously been extended from mid-January until the end of March.

‘It seems likely that the VAT cut for tourism and hospitality will be extended’, says Jon Hickman, corporate tax partner at BDO.

Kendra Hann, a tax partner at Deloitte, agrees the tax cut worth £2.54billion is likely to be extended for a short period.

‘These businesses are still being impacted more than most by lockdown restrictions and this could help to ease the burden once they begin reopening’, she says.

Under the Prime Minister’s roadmap out of lockdown, hospitality venues are not expected to fully reopen until 21 June at the earliest.

The tax cut and the Government’s VAT deferral for businesses, announced last March, helped reduce HMRC’s tax take by 12.1 per cent in the year to January 2021 compared to the same month a year earlier.

However it remains to be seen if the rules attached to the cut are adjusted along with any extension.

Climate change: Green issues could be highlighted in the Budget in preparation for the COP26 meeting in Glasgow this November

Students

With campuses closed and many students paying more than £9,000 a year to study from their bedrooms, the 2020-21 academic year has been a miserable one for university freshers.

Students have been hit hard financially, with rent bills still due at the same time as part-time jobs, and in some cases their parents’ income, have dried up.

Close to £1billion has been spent on unused university accommodation since September, according to a survey by money site Save the Student.

Half of the 1,355 students polled were struggling with rent and only 6 per cent were able to get a refund from private landlords.

There have been calls for the Government to underwrite rent payments owed by disadvantaged students and set up a £700million hardship fund, while a petition calling for a partial refund of tuition fees received more than 270,000 signatures.

However, although the Department for Education has provided £70million to ‘students most in need’, there does not seem to be a great expectation more will be announced in the Budget.

‘I have to be honest and say that whilst we are hoping for some sort of help for students I’m not holding my breath, Save the Student’s Jake Butler told This is Money.

‘I get a sense that the Government are hoping the new academic year will come around and that this situation will be forgotten or kept quiet enough until it goes away.’

Climate change

Green issues could be highlighted in the Budget as the COP26 meeting will be held in Glasgow this November.

A carbon tax may be introduced but if not, then to accompany the new plastic packaging tax there may well be consultations on new levies on single use items so they can also take effect from April 2022.

Alcohol duty: Nightclub and pub industry will shortly be emerging from lockdown

Sin taxes

These are an obvious and easy way for the Chancellor to raise some cash, but it’s unclear whether we’ll see a blanket sin tax hike since plans to increase duties on beer, cider, wine and spirits were scrapped last March.

Raising taxes on tobacco and alcohol would be an unpopular move due to the impact on the hospitality, nightclub, and pub industry, which will shortly be emerging from lockdown.

But Chris Snowden, head of lifestyle economics Institute of Economic Affairs, points out that the rate freeze last year hasn’t penalised the government and the industry, saying: ‘For spirits, for example, revenue went up 25 per cent in January this year so the government should learn lessons from that.’

Meanwhile, tobacco prices went up twice last year and Simon Clark, director of smokers’ lobby group Forest, says: ‘Common sense suggests this is no time for yet another increase in the cost of tobacco.

‘Tobacco taxes are already at punitive levels in the UK. Increasing tobacco duty again would discriminate against the less well-off at a time many people are already struggling.’

Small businesses

Reports suggest a rise in corporation tax from 19 per cent to 23 or 24 per cent is on the cards, but small business support groups and campaigners have called for any increase to be targeted towards bigger firms.

Meanwhile there are concerns that possible capital gains tax reforms could harm business growth and investment, precisely when the country needs it most.

What small businesses really want is greater certainty about what reopening the economy will look like, and what financial support will be available until we reach a recovery.

Michelle Ovens, of Small Business Britain, says: ‘Measures to reduce their costs, like an extension to furlough and the business rates holiday, cuts to VAT rates and other help to pay bills through extensions to local grants and the Bounce Back Loan scheme, will all be welcome.’

Driving taxes: Car owners will be keeping an eye out for any update on a road pricing scheme

Fuel duty

The big question for motorists is whether the Chancellor will bring to an end the decade-long freeze on fuel duty, with the tax on petrol and diesel held at 57.95p per litre since 2011.

Reports suggest the Treasury has been calling for fuel duty to be increased for years, but lobbying by campaign groups has prevented this from happening.

While hiking a tax that’s been flat for over a decade might seem like an easy way for Sunak to recoup funds, drivers are already set to endure months of higher refuelling bills with the predicted threat of oil prices surging to record levels between now and 2022.

With millions of Britons reliant on their cars for a return to work once lockdown measures are lifted, now might not be the best time to sting them at the pumps.

Car and road taxes

Car owners will be keeping an eye out for any update on the possibility of a road pricing scheme being introduced.

Sunak has been tasked with a new taxation strategy on drivers as we switch from petrol and diesel cars to electrified vehicles.

With first-year Vehicle Excise Duty rates based on CO2 outputs of motors, the current car tax system will soon become obsolete.

A number of major manufacturers in recent weeks – including Britain’s biggest car maker, JLR, and the nation’s most-bought brand, Ford – have outlined their strategies for ditching internal combustion engines by the end of the decade, in line with the Government’s ban on the sale of new petrol and diesel vehicles from 2030.

This could prompt the Chancellor into revealing his intentions on taxing drivers in the future.

In the meantime, there could be changes to VED that affect drivers now. Deep in last year’s Budget document was a suggestion that ministers could look at ways of reforming VED so that owners of the most polluting petrol and diesel cars are penalised with higher annual charges.

The 2020 report said ministers would investigate backdated measures, which could see a low annual ‘standard’ flat rate of VED replaced with a tiered system based on CO2 outputs. 

It could mean charges in excess of £2,000 for the highest-emitting models.

Compiled by Tanya Jefferies, Myra Butterworth, Grace Gausden, George Nixon, Rob Hull, Jayna Rana and Angelique Ruzicka