The country has already seen a number of hefty tax increases in 2021, with the Spring Budget in March and last month’s announcement of the introduction of the Health and Social Care Levy.
The main headlines from the Spring Budget were the freezing of the personal tax allowances, which are estimated to generate £21bn in total by 2025/26, and the increase to Corporation Tax to 25% from April 2023 bringing in a further £45bn at the same time.
The Health and Social Care Levy will generate approximately £12bn a year from next April, adding another £48bn in total by 2025/26.
Whilst these numbers sound heavy, the amounts raised only scratch the surface when compared to the £300bn cost of the pandemic support measures and the national debt now over £2 trillion.
What tax levers can the Chancellor realistically pull under the backdrop of rising fuel prices, the risk of higher interest rates and rumours of a rift with the Prime Minister – another difficult Budget in store for the Chancellor’s third Budget statement.
The most significant measure has already been announced with the introduction of the Health and Social Care Levy, adding 1.25% to National Insurance and dividend tax rates. However, there is pressure from the Labour opposition to already extend the scope of the tax to Capital Gains Tax (CGT) and Inheritance Tax.
The threat of higher CGT has been there since the start of the pandemic, but the attention on this meagre tax is questionable as it only raises £10bn a year (around 1.5% of total annual tax revenues). With the mounting political pressure, applying the Health and Social Care Levy to the existing CGT rates would be an easy move for Rishi Sunak. However, a pre-announced increase to CGT from April 2023 would serve to artificially boost the Treasury’s coffers as business owners and investors would rush to accelerate transactions to beat any rate increase.
Don’t forget that CGT was increased in Rishi Sunak’s first Budget in 2020 when the Entrepreneurs’ Relief lifetime limit was cut from £10m to £1m, costing a business owner an additional £900,000 in CGT, and the Treasury benefitting by £6.3bn by 2024/25.
A reform of capital taxes is long overdue, but this won’t be the Budget for such dramatic changes. The chances of a wealth tax are almost zero, especially now that it has the backing of Sir Keir Starmer. However, the Chancellor could choose to open the envelope which limits the amount of tax relief when someone sells their main residence – it would be a deeply unpopular move amongst the traditional Conservative voter, but it would appeal to the ‘red wall’. Reducing main residence relief is the only area left to the Government when it comes property taxation, after a raft of changes over the last ten years making residential property one of the most heavily taxed asset classes.
Another long-rumoured measure would be to finally limit pensions tax relief to the basic rate. With the reduction to the annual allowance for ‘higher earners’ allowing £4,000 of annual tax relievable pension contributions, now may be the time to abolish the higher rate tax relief for pension contributions.
Further increases to personal taxes can be ruled out, given the impact of recent changes on middle-earning families. A typical family of four with one working parent earning £62,000 will be £649 worse-off per annum in 2022/23 than 2010/11 with changes to rates, allowances, and thresholds. With the Spring Budget announcement that the personal allowance and higher rate threshold will be frozen until April 2026, the point at which someone pays 40% Income Tax will have only increased by £6,395 in 15 years (or just over £400 per year). With the effect of wage inflation, more people and families than ever will be dragged into 40% taxation.
Further increases to personal taxes can be ruled out, given the impact of recent changes on middle-earning families.
With the upcoming COP26, the Chancellor is likely to use this Budget to announce ‘green’ measures, which could provide incentives for investment in green technology and business infrastructure – it may only be ‘window dressing’ at this point though.
Business rates and council taxes are in need of urgent review, but these remain in the ‘too difficult’ column for the Government – the upfront cost of reforming both taxes is considered too great.
There are a number of ‘technical’ consultations out there, which could prompt several changes, such as moving the tax year end date and reform to basis periods – neither will increase the tax take but will accelerate tax receipts to massage the Government’s figures.
As is now customary at every Budget, more money will be available to HM Revenue & Customs (HMRC) to tackle tax avoidance and evasion and expect the Pandora Papers to be referenced in the Chancellor’s speech. I wonder how long it will be before a ‘HMRC levy’ is introduced to fund HMRC’s creaking resource and systems as we get closer to Making Tax Digital, or its full introduction may be delayed (again).
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