As Prime Minister Boris Johnson announced the latest significant milestone in the easing of England’s lockdown measures on 17 May, there is an even greater optimism around the UK’s economic outlook. The Bank of England two weeks ago said that the UK economy is on track for an even stronger economic recovery than first predicted, underpinned by the pace of the vaccine rollout. The Bank of England now expects the economy to grow 7.5% in 2021 and to recover to the pre-pandemic level, following the dramatic declines in 2020.
Speaking at the Wall Street Journal’s summit in May, Chancellor Rishi Sunak proclaimed that the UK’s present tax system was ‘very progressive’, and that higher earners contributed a large share of tax receipts. Sunak said: “The top one per cent, for example, of income earners pay or account for almost 30 per cent of all income tax receipts as it is…”
There has been incredible speculation around future tax increases, ever since the Government’s Coronavirus support packages were announced this time last year, and there were immediate questions around how the Government was going to pay back the money and service the cost of its borrowing. The attention turned towards a tax raid on wealth, with proposals to increase Capital Gains Tax and the threat of a one-off wealth tax, with the latter projected to raise £280 billion (but still someway short of the £355 billion Government borrowing to support the pandemic efforts).
However, the Chancellor now seems more at ease with the UK’s progressive tax system and the contribution of higher earners, which will bring a sigh of relief from the wealthy population who may have been considering a destination abroad to escape the UK’s future tax clutches.
Sunak pointed to the re-opening of the economy, and the expectation that British households will go on a spending spree of the estimated £140 billion saved up during the last year, with the economy receiving its own ‘shot in the arm’. There will be a correlated boost to tax receipts, with higher VAT through increased spending and greater PAYE because of reduced unemployment. It may take a bit longer for Corporation Tax to recover, as some businesses will have built-up trading losses and the Chancellor’s ‘super-deduction’ will provide a temporary reduction to taxable profits before the Corporation Tax rate increase to 25% in April 2023.
It is the first time during the Chancellor’s difficult term that he has provided any level of comfort that tax increases are not imminent, which will provide confidence to businesses, entrepreneurs and investors alike. Sunak’s comments will also have appeased Boris Johnson, who has been firmly against any ‘tax horror show’, and shown signs of frustration at times towards his Chancellor.
It is far too early to say that the tax question has been firmly put to bed, and doubters will look worryingly at President Biden’s US tax reforms and wonder if the UK will follow suit. With indoor drinking and dining only recently allowed, it is also too early to say whether the economic recovery will be as strong as the Bank of England and Chancellor hope. The true threat of tax increases will only be known at the Autumn Budget (if that even takes place) and the Chancellor and interested stakeholders will be watching the economic progress closely between now and then.
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