Tax increases – it is a taxing future


10th September 2020

We live in extraordinary times. The last five months have seen unprecedented government intervention into our lives in so many ways, not least the massive economic contribution made in a bid to support individuals, businesses and protect jobs so tax increases should be expected.

Future tax increases

Now we need to look to the future and understand what is needed to kick-start and support economic growth and provide stimulus to a battered economy.  Balance that with the need to collect revenue to shore up depleted reserves and none of us would wish to be in Rishi Sunak’s shoes at the moment.  The economy is shedding jobs (estimated to be 2 million by the time the furlough scheme comes to an end) and consumer demand is low.  The Chancellor’s challenge is how to collect revenue which does not add to the pain being experienced by businesses and individuals and which revenue stream should he tap in his bid to top up the government coffers?

The language in the press in the last few weeks has been emotive:  “soak-the-rich measures”, biggest tax rises in a generation” and “radical shake-up”.  But nothing is certain yet.  We are all speculating at what moves the Chancellor will make.  Some moves, however are more likely than others.  If we take a step back for a moment and consider the options, we can take an educated best guess.  Readers must note, though, that is all that this is: an educated best guess.  Rishi Sunak has not yet announced the date of the Autumn budget and there is speculation that it may even be postponed until Spring 2021 to allow the full economic picture of the impact of Covid-19 to emerge.

So, until there is certainty about the measures, let us consider the options.

What changes are being mooted?

There are several which it is said are being considered.  The most high-profile are:

  • Increasing corporation tax from 19% to 24%;
  • Increasing capital gains tax rates so that they are in line with income tax rates. That means an increase from 20% to 40% or 45% (at the higher rate); and
  • Re-looking at the pension triple lock.

What do we know?

Capital Taxes

We know that the Chancellor has asked the Office of Tax Simplification to review how capital gains tax (CGT) works, consider which aspects are particularly complex and to hear from stakeholders suggestions for improvements to the operation of the tax.  A call for evidence was published in July 2020.

According to HMRC, capital and wealth taxes contribute less than 10% of the tax receipts of the UK[1], significantly below the takings from income tax, National Insurance Contributions, VAT and corporation tax.  Therefore, not a lot of tax is being paid by a small number of taxpayers.  Even without the pandemic to pay for, this is unsustainable from a policy point of view and politicians in the UK had already put capital taxes firmly in the limelight.

Only increasing the rate of capital gains tax without taking any other action doesn’t suggest a large stream of revenue for the Chancellor to count on.  It also places a disproportionate burden on a small group of people.  Rather it would seem that a more holistic set of changes, aimed at increasing the number of people that fall into the capital tax regime, reducing reliefs and making it less easy to arbitrage capital taxes against income tax may be the approach. We only need to look at the themes highlighted in the OTS call for evidence to understand how wide ranging the review will be:

  • Looking at allowances, including the annual exempt amount, its level and the extent to which it distorts decision making;
  • Exemptions and reliefs, including how they fit together and the extent to which they incentivise some decisions over others;
  • The treatment of losses within CGT, including the extent to which they can be used and whether the loss regime distorts decisions about when to buy or sell assets; and
  • The interactions of how gains are taxed compared to other types of income, including how the boundary between what is taxed as gains rather than income works. [2]

Corporation Tax

An increase to 24% would be significant and it would hit employers and businesses at a time when so many are reeling from the impact of the lockdown.  It would be an unpopular move and one that has already generated significant negative press and political reaction, but we don’t think it can be ruled out.

Pensions

Much talked about is the triple lock.  This ensures that state pensions are guaranteed to increase by whichever of the following is the highest:  earnings growth, price inflation or 2.5%.

What it means in an economic recovery is that working age contributors to national insurance pay for the increase in pensions.  If national insurance contributions are increased, not adjusting the pension triple lock formula seems inequitable, particularly if income tax relief for higher rate income tax payers is reduced and the burden of all the changes around pensions falls entirely on the working population.  Pension commentators are speculating as to which elements of the formula would be up for amendment but it seems likely there will be one and those in receipt of state pensions should prepare for a change.

[1] National Statistics: HMRC tax receipts and National Insurance contributions for the UK

[2] Office of Tax Simplification, Capital Gains Tax Review – call for evidence, July 2020

What should you do next?

If you are a business owner, you may want to be thinking about when to make the next round of capital expenditure.  If you are an investor, you will be thinking about wealth protection strategies.  Savers who are in a position to do so will want to maximise contributions to ISA’s.  There are definitely some strategies to be thinking about now and which we can help you consider.  Given that we don’t yet know if there will be a budget in the autumn and we don’t know with enough certainty which changes the Chancellor will opt for, any restructuring you are considering should make sense in the wider context of your tax and business affairs.

If you want to talk any of this through, please contact our tax team, or get in touch with your usual Blake Morgan contact.