Ten Budget predictions from the MHA tax partners

As we get closer to the Budget and there is talk of public spending reduction to fund his proposals, we think a cut by the Chancellor to the headline rate of income tax is still a possible option although it is clearly the most expensive option on the table.

A reduction in Income Tax impacts everyone, unlike the NI cuts made last year and is easier for people (and voters) to understand than the other more complex changes options. A 2p cut to income tax would leave someone earning £35,000 a year with roughly £450 of extra income.

While not as eye catching (or as expensive) as an actual reduction in Income Tax announcing an unfreezing of personal allowances as a way of dealing with the so-called fiscal drag would be popular especially among those who have entered the 40% tax rate bracket since 2019.

Although it would be welcomed with open arms by hard-pressed business there will be no reduction in Corporation Tax this year but to encourage future investment and growth, we think the Chancellor should at least signpost future potential reductions.

With the permanent introduction of Full Expensing last year, 100% first year allowances on Energy efficient equipment are now largely redundant which removes the incentive for companies to invest in greener, more energy efficient capex.

How to change the narrative?

Potentially the re-introduction of a ‘super deduction’ capital allowance providing greater than 100% tax relief, but specifically for energy efficient capital expenditure.

Given the Chancellor has less room for fiscal manoeuvre than he hoped, Stamp Duty Land Tax is an obvious candidate for cuts especially as it is so high at 15%. A give away costs a fraction of the potential reductions in other taxes and would be popular by making houses more affordable, but also good for the economy by giving a boost to the construction sector. Or alternatively why not make the seller pay the duty to encourage first time buyers.

The land of indirect tax

On indirect taxes we think it a given that the Chancellor will re-introduce the tax-free shopping scheme for international tourists announced by his boss in 2021. And he could reintroduce the reduced rate for hospitality and holiday businesses dropped in 2022.

Further wholescale changes are unlikely to VAT given the notorious challenges associated with tinkering with the rate except a possible raising of the VAT registration threshold from £85,000 (frozen since 2018) to £250,000 to deal with a tax driven disincentive to SME growth.

Wholescale removal of Inheritance Tax appears to have fallen out of favour with the Treasury, but we still think a reduction in the headline rate of 40% and an increase in nil rate band from £325k (introduced in 2009) where the tax kicks in could be a concession to Tory backbenchers and encourage more wealthy business owners to relocate to the UK.

Given April 2024 will see both capital gains exemption and dividend allowances halve the Chancellor is likely to be tempted to replicate his increase in the Pension allowance last year by introducing an increase in the tax-free ISA limit to say £25,000.

It is highly likely the Chancellor will want to reform the well documented anomaly in the Child Benefit earnings threshold which currently sees one person earning £60k not receiving any child benefit, but a two people household each earning £50,000 getting full payment.

Finally, we expect the Treasury will clamp down on the sale of companies to Employee-Owned Trusts including banning offshore trusts and requiring former owners to give up control. Changes are needed to the scheme, including requiring employees’ involvement in decisions made by the trust.