12 months ago, Chancellor Rishi Sunak would not have imagined that he would have been delivering his second Budget following countless announcements throughout 2020 and a package of economic support not seen in modern peacetime.
This Budget is very different to Sunak’s first – it comes with the threat of tax increases that have been building since he announced the furlough scheme last March, and the question of when and how the country would start to repay the cost of the Coronavirus pandemic.
Universal tax increases
When the 3 March Budget date was announced in December, there was immediate speculation that this Budget would signal the start of universal increases to tax. It’s the earliest Budget date for some years and the theory was that the Chancellor would announce various tax increasing measures which would take effect from 6 April.
The early Budget announcements would give people the time to complete transactions over the next month. This would also have the effect of creating an artificial period for people to crystallise transactions (such as capital gains) which will give the Treasury an unexpected tax revenue boost the following January when that tax would be paid – this approach has been used by past Governments to present favourable finances because of manufactured spikes.
Capital Gains Tax
There has been incredible speculation that Capital Gains Tax (CGT) will be increased and possibly aligned to Income Tax at up to 45% – a measure proposed by the Office of Tax Simplification (OTS) after the Chancellor had written to the OTS last July to review CGT. The best estimates suggest aligning CGT to income tax would double CGT receipts to £20 billion.
More recently, there are suggestions that the 19% Corporation Tax rate could be increased to 23%, raising £14 billion. This would seem counter-intuitive in supporting business – more so against the backdrop of Brexit. After all, the UK is supposedly ‘open for business’. Any increase to business taxes would have to be targeted against the big corporates who have profited through the pandemic, but this would mean a return to the two-tiered Corporation Tax system of previous years which adds unnecessary complexity.
The ‘Triple Lock’
The Chancellor has his hands tied because of the Conservative manifesto pledge to not raise the ‘big 3’ taxes – Income Tax, National Insurance and VAT, the so-called ‘triple lock’. These three account for almost three quarters of the Government’s total tax revenue, so the Chancellor remains severely constrained if he cannot pull these tax levers.
However, I wouldn’t rule out the Government making tentative steps to break the triple lock and announcing a future universal increase to income tax and/or VAT citing that these are ‘unprecedented’ times. A 1% increase to the basic rate of Income Tax is expected to raise £4.7 billion and the mechanisms are already in place to quickly collect the funds through the PAYE and Self-assessment systems.
The self-employed could be singled-out with increases to class 4 National Insurance and changes to how consultancy/contractor companies are used. The Chancellor would be following through with his warning that the self-employed would need to pay for the Government support in the future when he announced the Self-employment Income Support Scheme last April.
Temporary NHS Surcharge
The Chancellor could show his ingenuity by introducing a one-off temporary surcharge on all forms of income and capital gains, with the additional revenue channelled to the NHS – the temporary period could conveniently run until just before the next election. The Chancellor has repeatedly ruled out introducing a wealth tax, but the Wealth Tax Commission’s report in December offered a £262 billion tax injection which would have turned anyone’s head.
It wouldn’t be a Budget without property being under the radar of another tax grab. A tax on second homes or a restriction to capital gains main residence relief have been rumoured previously and the Chancellor will undoubtedly be tempted. On the flip-side, there is growing pressure to extend the Stamp Duty Land Tax (SDLT) holiday for purchases up to £500,000 or make it permanent, and some tax giveaways should not be completely ruled out, although it would seem very unlikely given the state of the country’s finances.
Pensions tax relief
Pensions tax relief, estimated to cost around £25 billion per annum, has been the subject of much speculation at recent Budget announcements and now could be the opportune time to close that relief completely.
Since the Budget date was announced in December, the landscape has completely changed with another national lockdown, which was not anticipated at the time. It is now very questionable whether this Budget is the right time for dramatic tax changes – schools will not have re-opened and the lockdown restrictions barely eased. The Chancellor could shelve the Budget altogether or use the opportunity to introduce a further package of support for businesses to aid the economic recovery. We shouldn’t rule out the furlough scheme being extended again, which is due to close at the end of April (but we have heard that before from the Chancellor).
Don’t rule out the Chancellor kicking the Budget into touch for now, which may be the perfect answer.
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