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A boring budget isn’t a bad thing. Just think of the alternative







‘Box Office’ Phil served up little drama, but investors would have found his Labour shadow’s tax rises exciting in all the worst ways

The chancellor was hamstrung by economic and political weakness into delivering the most boring budget in living memory last week. But we investors should not let that lull us into inaction. As I dozed through what might have been the Tories’ last chance to set out their financial stall before the next general election, I was awoken by a nightmarish thought. Philip Hammond’s failure to produce many vote-winning reforms might pave the way for the shadow chancellor, John McDonnell, to replace him.

So investors had better take action now before McDonnell is in a position to super-size our tax bills. Chas Roy-Chowdhury of the Association of Chartered Certified Accountants told me: “If the next budget is a Labour budget, then it will be anything but boring. So perhaps we should be grateful for what we got. Steady as she goes should be the mantra for chancellors. There has been too much tinkering and changing over the years.”

But wishing is not the same thing as getting, and other experts shared fears about the future. George Bull, senior partner at accountants RSM, said: “Clients and colleagues are concerned at the prospect of increased tax rates under a Labour government, along with the introduction of new taxes.

“High among those concerns are fears that a wealth tax or land value tax could play havoc with their financial arrangements. Both taxes are mentioned in the Labour Party manifesto, so these fears may be seen as well founded.”

More immediately, from next April the starting point at which tax is deducted from investors’ income will be slashed from £5,000 to £2,000 a year. There was no reprieve in last week’s budget from this tax hike, announced last March.

Senior accountant Mike Warburton pointed out: “With shares and share-based funds yielding around 4%, this reduction in the dividend allowance means people with portfolios worth £50,000 or more are at risk.”

Fortunately, there is plenty of scope to shelter investment returns from the grasp of the taxman. Although Hammond did not mention it in his speech, the starting point for capital gains tax (CGT) will rise by £400 to £11,700 next April. This annual allowance, or slice of profits that can be taken before CGT must be paid, nearly doubles the annual tax-free returns that investors can enjoy because it is in addition to the personal allowance for income tax, which will rise to £11,850 next April.

For example, that means people planning to fund retirement from their investments will be able to receive a total of £23,550 a year tax-free from a mixture of income and gains, or dividends and shares sold at a profit.

As usual with fiscal allowances and reliefs, those who pay the most tax stand to gain the most. Nimesh Shah, a partner at accountants Blick Rothenberg, said: “The £350 increase in the income tax allowance is overshadowed by the £400 rise in the CGT annual exemption. The latter is worth £80 to a higher rate taxpayer, while the former is worth £70 or £1.35 per week for a basic rate taxpayer.”

This unheralded shift in the emphasis of tax breaks, from income to gains, should be taken into account by investors. Warburton pointed out: “With the dividend allowance reducing and the CGT exemption rising, this is an added incentive to go for capital growth. There are many unit and investment trusts to choose from that offer lower income in exchange for higher capital growth.”

Even when gains exceed the annual exemption, the maximum rate of CGT is 20% — or half the 40% rate of income tax paid by most high earners. On that point, it is worth noting that from April you will be able to earn £34,500 beyond the personal allowance before you start having to pay 40% income tax — which is £100 less than a decade ago. Fiscal drag is a fancy phrase for freezing allowances and thresholds, while inflation lifts more people into the net. No wonder rising numbers of people are paying higher rate tax.

While there is not much most of us can do about tax on our earnings, savers and investors have plenty of options to place assets legitimately beyond the grasp of HM Revenue & Customs. For example, everyone is allowed to put up to £20,000 a year in an individual savings account that immediately renders any income and gains taken from that Isa tax-free.

Pensions can be an even bigger tax shelter for many savers and investors, although the earliest age at which withdrawals are allowed for most occupations is 55 and there are complex restrictions on how much can be put in, depending on the individual’s income.

The good news for pension savers from the budget was that there was no news and all the retirement funding rules remain the same. Odd though it is for a journalist to say so, that may be the best thing about Hammond’s fiscal strategy: it lacked excitement, but it delivered stability. That’s what most savers and investors want when it comes to making long-term plans to buy a home or pay for old age.

It is easy to mock Hammond for dullness — his nickname in the cabinet is, apparently, “Box Office”, because he isn’t. But, with McDonnell waiting in the wings, anyone bored by last week’s budget should be careful what they wish for.

Mind the surprising £5bn tax gap: why the rich aren’t the worst dodgers

Everyone knows that big companies are running rings around HM Revenue & Customs, while rich folk dodge paying their due
with avoidance schemes, and that tax is just for little people. Right?

Well, no, that’s all wrong, actually. Contrary to what many imagine, HMRC reckons tax totalling £100m a week, or £5.2bn a year, is dodged by criminal evasion — typically, individuals failing to declare cash-in-hand payments. That’s three times the £1.7bn sum the authorities calculate they are short-changed every year through clever-dick tax avoidance schemes.

HMRC adds that it loses further revenue because small and medium-sized companies are paying a total of £15.5bn less tax than it estimates they should. That’s half as much again as the £9.7bn tax shortfall it attributes to avoidance by big companies.

The total tax gap — the difference between what the Revenue reckons it is due and what it actually collects — is £34bn, or 6% of all liabilities.

Anyone tempted to think the distinction between tax avoidance (which is legal) and tax evasion (which is not) sounds like mere semantics should consider this cautionary definition. Accountants say the difference between avoidance and evasion is the thickness of a prison wall.

So, while my right-on fellow north Londoners love to fume about tax-dodging millionaires and multinationals, the real problem is tax evaded by all those nice people — often only known by their first names — whom they pay in cash to look after their kids, clean their homes and weed their gardens.

Don’t blame Apple — ask Annie the nanny if she is paying her due. Don’t get grumpy about Google — check that Greg the gardener has joined HMRC’s contributors’ club.

Although it is always more comforting to blame somebody else for the squeeze on public spending — best of all big businesses based overseas — the real problem is uncomfortably closer to home.