Higher earners to bear brunt of Treasury tax-raid plans

Investors, pensioners and others in line for capital gains and income-tax rises in the November Budget.

Investors, pensioners, landlords and high earners are the groups worst affected by new Treasury tax raid plans, experts say.

Treasury officials are understood to be devising a £30 billion tax raid in the November Budget.

Pensions tax relief for higher earners is reportedly set for the chop in the Budget. In the current system, basic-rate taxpayers get 20% pension tax relief, while higher-rate and additional-rate taxpayers can claim 40% and 45% respectively.

Former pensions minister Steve Webb, who is a partner at LCP, a pensions consultancy, says: “Ahead of every Budget, the Treasury has a long list of things they look at reforming, but they don’t always make the changes.

“They have looked at reforming pension tax relief for years, but rather than making big radical reforms, they've previously ended up in the salami-slicing camp by squeezing the annual and lifetime allowances.”

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June research published by the Pensions Policy Institute showed around 50% of the tax relief on defined contribution (DC) pensions is associated with individuals with incomes above £60,000 a year. It found that introducing a flat rate of tax relief at a 30% rate would increase the proportion of DC pension tax relief from basic rate taxpayers from 26% to 42%. 

There are around five million higher-rate taxpayers in the UK. “Introducing a flat rate of tax relief would mean losses of thousands of pounds for people who may be on £60,000 a year - people who earn above the average wage but aren’t fat cats,” added Webb.

DeVere Group chief executive and founder Nigel Green warned that higher earners should expect to get a “bloody nose” from the Budget and should take action sooner rather than later to mitigate the burden.

Another Treasury proposal is to bring the capital gains tax (CGT) regime in line with the income tax regime. Gains are taxed when they exceed an annual allowance, which is £12,300.

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Basic-rate taxpayers are charged 10% on the sale of assets (which includes shares, bonds or funds that are not in an ISA wrapper) and 18% on sales of second-homes or buy-to-let property. Higher and additional-rate taxpayers are charged 20% on assets, and 28% on property.

CGT revenues already hit record levels of £9.5 billion during the 2018-19 tax year, up 6% year-on-year, although the number of people paying fell slightly, according to HM Revenue and Customs (HMRC). Some 40% of the bill was paid by a small group of taxpayers who made gains of £5 million or more.

The move would disproportionately impact individuals who have used their life savings to purchase a buy-to-let property as part of their retirement plan, according to Mart Abramov, chief executive and co-founder of TaxScouts.

He says: “I worry that this latest hit will not only disincentivise new landlords from joining the market but for those forced to sell up, they’ll have their tax bill hiked up from 28% to 40%. That’s a massive blow to the pension pot on top of the incurred losses over the last year due to previous tax changes.”

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