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COVID-19 has hugely damaged the UK economy, adding over £400bn in public debt over a 12 month period. For some time now, many commentators have anticipated the announcement of tax rises to help address this. One of the big surprises of March 2021, therefore, was that these failed to materialise in the Chancellor’s Budget – or on “Tax Day” (23rd March). Instead, the UK government has opted for certain tax rises on big business and tax freezes on many allowances to start plugging the hole in the nation’s finances.
However, these unexpected tax measures do not mean that tax rises could not happen later in the year, in 2022 or in future years. Below, our team at Cedar House highlights some areas of tax that could change in this period. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
In 2019, the Conservative Party was elected on a manifesto which promised not to raise income tax, national insurance or VAT. So far, this promise has technically been honoured. Yet the 2021 Budget announced a freeze to the income tax-free personal allowance at £12,570 for the next 6 years. This has been labelled a “stealth tax”, since over this period average wages are expected to rise – meaning that over 1m more people could start paying income tax.
It’s also important to highlight other areas where taxes could change in future months/years. An important one is pensions, where the current system of tax relief is under scrutiny. At present, you receive 20% tax relief on your pension contributions if you are a Basic Rate taxpayer, or 40% if you are paying the Higher Rate. It is possible that this could change to help balance the UK’s books. For instance, perhaps an equalised rate of 25% tax relief could be introduced to all taxpayers – irrespective of income. Inheritance tax (IHT) could also change in the near future as politicians seek to simplify the system and raise more revenues.
Investor & wealth taxes
There was no pledge in the 2019 Conservative manifesto to not raise taxes on capital gains or dividends. Whilst no rises were introduced in the March 2020 Budget, they could occur in future years. After all, there is precedent for this. Under the Thatcher Conservative government made capital gains tax (CGT) equivalent to income tax brackets (as opposed to the current system where the former is lower than the latter). The likelihood of a CGT rise is unknown, however, since it could be politically costly and the extra revenue could be limited (e.g. only £8bn).
Another idea that has been floated is a proposed “wealth tax” – led by academics from LSE and other universities in a 2020 report by the Wealth Tax Commission. This suggests levying a “one off” tax on assets over £500,000 (including property) to raise £260bn, to try and rectify some of the public debt brought about by COVID-19. Such a tax seems unlikely at present, but it seems to remain a possibility which could become less distant if, say, a Labour government is elected at some point in the next 5 years.
Property, business & “green” taxes
Perhaps the most notable announcement in the March 2020 budget was the new corporation tax rate which will be introduced in April 2023. This will levy a 25% rate on company profits exceeding £50,000. All other businesses will pay the current 19%. Yet this may not be the end of the matter regarding business taxes. In particular, a new “digital tax” is still under review which could levy a 2% tax on social media services, search engines and online marketplaces in an attempt to “level the playing field” with highstreet shops (who pay business rates).
With regards to property, at the present time the “stamp duty holiday” has been extended until June 2021 to try and stabilise the housing market, encourage transactions and ease the deal backlog. Yet the Chancellor may be minded to go a step further in future months/years, getting rid of council tax and stamp duty altogether for a “property tax”. The Fairer Share campaign suggests an annual flat rate property tax of 0.48%, although such a huge change could be very hard for the UK government to introduce. Perhaps more likely is the possible introduction of a range of new “green taxes” in the near future. These could include higher fuel duties and/or reduced VAT on energy-saving products, such as insulation and solar panels.
All of the above, at this stage, is educated guesswork about what the UK government may do with taxes in 2021, 2022 and beyond. If recent experience with the March 2020 budget has taught anything, it is to try and expect the unexpected. Making drastic changes to your financial plan based on what “might happen”, therefore, is probably a bad idea. However, the range of likely scenarios could have important implications for your financial plan. Having an inflexible financial plan, for instance, could leave little room for manoeuvre if the tax landscape changes.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938