The Chancellor must drive savings and investment to fuel her growth agenda, not look to the likes of increases in CGT, IHT and dividend rates. That’s the view of Andy Butcher, Branch Principal & Chartered Financial Planner, Raymond James Investment Services, as he tells us his thinking on why Rachel Reeves should be prioritising investment and growth in her Budget speech next week – and where the red flags fly – as follows:
CGT: Demystify investment to address savings gaps
As Butcher explains: “Despite her focus on capital gains tax (CGT), the Chancellor must ensure any decisions do not deter investment. In the UK, investing is seen as the domain of the wealthy. This is a harmful view and investing into financial markets needs to be normalised.”
“By hiking CGT, the Chancellor could further dissuade long term investment, particularly given the slashing of the CGT allowance over recent years. If the rate of CGT is to increase, valuable relief could be given by increasing the CGT allowance to £10,000. This would embolden smaller investors and avoid the need to complete onerous tax returns for relatively small gains.”
Dividend tax rates: Do not stymy the SME economy
“Alongside CGT, if Reeves chooses to hike dividend tax rates, the UK’s longer-term growth will take a hit. UK equity markets remain unloved and desperately need a shot in the arm. While the hike may provide a short-term boost to the Treasury, in the longer term, companies will think twice about listing in the UK.”
“Currently, many small business owners will draw an income via a dividend. The benefit of doing so relative to taking a salary has reduced significantly over recent years, and an increase in dividend tax rates would further erode the advantages of owning a company. Small businesses are the lifeblood of the UK economy, but setting up and running a small company involves significant risk. Disincentivising entrepreneurs is not a recipe for long term economic growth from a supposedly pro-growth government.”
Pensions: Refrain from reviews to encourage saving for retirement.
“Successive governments have targeted pension reform to raise capital. But, by potentially tinkering yet again with pensions, confidence in pension savings will be damaged. Already, many high earners have taken preventative action in response to rumours around the possible reduction of tax-free lump sums by removing cash from their pensions. This could have long term implications as the money they have drawn becomes subject to other taxes. This could lead to a shortfall in their required income later in life – a negative for economic growth and a potential burden on the state.
“There is also talk of adding employers’ national insurance to company pension contributions. In practice this represents a first step towards flat rate tax relief. Under the current regime, a flat rate relief would be ineffective as it could be bypassed through salary sacrifice arrangements and would be too complex to administer.
“There needs to be cross-party consensus to encourage saving for retirement. The Government has already stated they do not plan to amend pension tax relief in this Budget announcement. They should also commit to refraining from future changes for the long-term benefit of savers.”
IHT: Further tax hikes would most affect younger generations
“Inheritance tax (IHT) has been muted as a target for the new Labour Government. With CGT seemingly on the increase and allowances low, appreciating assets will likely be taxed during one’s lifetime. It is grossly unfair to then levy taxes on assets’ value after death. As thresholds have not increased in 15 years, IHT bills have essentially increased annually with asset price growth. Any further hikes will harm younger generations who have already faced with inflationary pressures and rising taxes.”