The recent September spending review promised to ‘Build Back Better’. Will this upcoming Budget continue down that journey? Maybe so, but with a greater emphasis on a greener Britain, which would conveniently tie in nicely to the upcoming COP26.
Will this be the Budget of great tax reforms or a mere tinkering of them – given the current economic backdrop. Below we list our predictions for the upcoming Budget:
Income Tax and National Insurance Contributions
It has not even been two months since the announcement of the 1.25% hike in National Insurance Contributions (NIC) and dividend Income Tax rates which will come into force from April 2022. Given inflation spiralling, and rumours of interest rate rises, it seems unlikely the Government will further increase income tax or NIC at this Budget.
That being said, an alignment (which in fact would be an increase) of NIC for the self-employed and employed could be introduced. This was particularly unpopular when Philp Hammond partly moved towards alignment in 2017 albeit only temporarily, after an embarrassing U-turn by the then Government. However, maybe now is the time for the Government to increase NIC for the self-employed, under the premise that the revenue is used to cover the (limited) support provided during pandemic.
Capital Gains Tax
There have been strong rumours over the last year whether an increase in Capital Gains Tax (CGT) should happen. Current CGT rates are favourably low, but the tax has historically raised very little (around 1.5% of total tax revenues). That said, the Chancellor could choose to harmonise CGT to 28%, which is the rate that applies to capital gains on residential property and circling back to the regime which applied until 2015/16. An overnight rate increase is unlikely as it is complex to administer and a pre-announced increase from April 2023 is more likely.
The tax-free threshold for Inheritance Tax (IHT) has not changed in over ten years, neither has the rate of 40% which is considered one of the highest in Europe. Both these factors have caused many people to fall within the IHT ‘net’ in recent years. Therefore, it appears unlikely the Government are going to make any sweeping reforms to IHT at this Budget, especially as IHT revenues have steadily increased.
The temporary reduction of VAT from 20% to 5% for the hospitality sector was welcomed when it was introduced back in July 2020. The rate increased to 12.5% on 1 October 2021 and is planned to return to 20% in April 2022. The Government could consider extending the lower rate for a longer period. In a similar spirit, the Government could remove the 5% VAT on residential gas and electricity to combat the current rising energy costs for households.
The Government could announce a package of green initiatives ahead of COP26 summit in Glasgow next month. This could include the removal of complex rules that currently restrict the use of the 5% reduced rate for installing energy saving material. They could go further and remove VAT altogether, including the installation of solar panels which still attracts a 20% VAT rate for most house owners and landlord.
The Government should also look at the inequitable treatment of VAT on electric vehicle charging stations, which for on street and those located on commercial premises the rate is 20%, compared with 5% when you charge from home.
Tax relief on pension contributions
Currently, a higher rate and additional rate taxpayer receive extra Income Tax relief of 20% and 25% respectively on personal pension contributions paid in comparison with a basic rate taxpayer. The higher rate relief costs the Government £25bn, and following recent restrictions to the pensions annual and lifetime allowances for higher earners, the Chancellor may have positioned himself to finally close the curtain on pensions tax relief and limit this to the basic rate.
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For more information and predictions please visit our Autumn Budget 2021 hub.