In recent months, there has barely been a part of the UK economy not hit by the coronavirus pandemic. With more than eight million staff furloughed and millions more freelance and self-employed workers struggling to generate an income, the government has resorted to a range of unprecedented measures to support the economy.
In addition to the human cost of Covid-19, it is estimated that the government debt as a result of their support packages will be between £298 and £337 billion. To put this in context, before the pandemic hit, the government planned to borrow £55 billion.
So, with a huge hole in the public finances, there is much speculation that the Chancellor will have to announce a range of policy measures to raise additional revenue. This may even be done using an emergency Budget, so it might be important to act now before allowances, exemptions or taxes change.
So, what are the most likely changes Rishi Sunak will make?
1. An end to the pensions triple lock
The pensions triple lock guarantees an annual increase in the State Pension of:
- Average earnings
There has been speculation that the Chancellor could scrap this guarantee, saving around £8 billion a year. While it may not be popular with traditional Conservative voters, a leading think tank has suggested it is a way of helping to share the cost of the crisis between older and younger people.
Any change to the triple lock would potentially see a reduction in annual increases to the State Pension. So, if you are already in receipt of the State Pension, your payments may rise at a lower rate in the future.
2. An Income Tax rise
During the last General Election campaign, the Conservatives promised not to raise Income Tax, VAT or National Insurance contributions. Indeed, at his first Budget, the Chancellor increased the threshold at which individuals pay National insurance contributions.
However, the depth of the crisis means that changes to Income Tax could be necessary.
While a 1% rise in the basic rate of Income Tax would raise around £5 billion a year, the government are keen to ensure that it is not valued frontline workers who are hit with any tax rises.
Instead, it could be the higher rates of tax that rise. Scottish taxpayers already pay higher rates of 21%, 41% and 46%, so the Chancellor could increase taxes to mirror those north of the border.
In addition, Rishi Sunak has already hinted that taxes for self-employed workers will rise once the pandemic abates.
When announcing the Self-Employed Income Support Scheme in March, Sunak said: “It is much harder to justify the inconsistent contributions of people with different employment statuses. If we all want to benefit equally from state support, we must all pay in equally.”
3. Capital Gains Tax reforms
The government have already signalled that Capital Gains Tax (CGT) reforms may be coming. In his first Budget, the Chancellor reduced the lifetime allowance of Entrepreneurs’ Relief from £10 million to £1 million.
CGT has one of the lowest tax rates at 10% for basic rate and 20% for higher rate taxpayers (18% and 28% for residential property). This is after a generous allowance, equal to £12,300 in the 2020/21 tax year.
The most likely reform to CGT is that the rates of tax are brought in line with Income Tax rates, and this could double the tax take. The allowance could be reduced or abolished altogether, so it may be worth using the current allowance sooner rather than later. It also means utilising ISA allowances (where proceeds are free of Income and Capital Gains Tax) could be even more important.
Another option open to the Chancellor is to introduce a Capital Gains Tax charge on former main residences passed on after death – perhaps with the exception of cohabiting spouses and civil partners and recognised long-term related carers.
4. Changes to pension tax relief
Pension tax relief is one of the costliest tax breaks. The relief costs the Treasury £35.4 billion a year and most of this goes to higher rate taxpayers.
An option under serious consideration is to reduce the rate of relief to a flat rate for all taxpayers, rather than the taxpayer’s marginal income tax rate. An even more radical option would be to treat them like Individual Savings Accounts, where no tax relief on pension savings was given at all and, instead, growth and income are tax-free.
You are not normally permitted to access your pension until age 55, however if you save into a pension and are eligible for higher rate tax relief it may be wise to use up this relief soon, in case changes are made in an emergency Budget.
5. A new Wealth Tax?
A leading tax expert has argued that taxing wealth at the same rate as income could raise up to £174 billion a year for the Exchequer.
Richard Murphy, a professor in political economy at City University in London, says that income is being taxed at almost ten times the rate of wealth and that the disparity should play an important role in deciding who should pay for the pandemic.
In an analysis of the period from 2011 to 2018, Murphy said income had been taxed on average at 29.4%, while wealth – generated mostly from rising house prices and the increased value of personal pensions – had been taxed at 3.4%.
Professor Murphy told The Guardian: “What the data shows is that if we treat all sources of financial gain to a household, whether from income or from increases in the value of assets, as being of equal value then we have a very regressive tax system in the UK.
“That means that those on the lowest levels of income pay by far the highest tax rates, whilst those with the highest income pay at the lowest rates.”
Get in touch
If you’re concerned about possible tax rises, or potential changes to tax allowances and exemptions, now may be the time to act. Email email@example.com or call (0161) 8080200.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.