Who is going to pay for it all?
Are there inevitable tax rises coming?
As lockdown restrictions ease, countries across the world are contending with how to safely restart their economies after experiencing such an abrupt halt. It is too soon to know the total cost of the Covid19 pandemic to the UK economy, however; according to the Office for Budget Responsibility (OBR), it is likely to be more than £300bn.
The expected total Government revenue in 2019/20 was £811.4bn, and their expenditure on things such as public services, State Pensions and debt interest equated to £840.7bn leaving them with a deficit of £29.3bn which has now risen to some £329.3 bn!
People are now worried and asking how exactly are we going to start repaying the additional Covid19 debt?
The Government is faced with several options (other than just ignoring the situation):
- increase borrowing
- raise taxes
- cut spending
- a combination of all three options
If the Chancellor looks to raise revenue through changes within personal taxation, here are some of the changes we might see.
Capital gains tax
Last year CGT bought in £9.2 billion to the government.
On June 14th the Chancellor asked the Office of Tax Simplification (OTS) to undertake a review of Capital Gains Tax (CGT) to report on how the rates compare with other taxes.
Given the Conservative manifesto vow to not raise the three biggest taxes; Income Tax, National Insurance and VAT, CGT may be an area the Government looks at to raise revenue.
Simply put, CGT is a tax on the profit realised when you sell or ‘dispose of’ of an asset that has increased in value. The key allowance to be aware of is the CGT allowance, which is currently £12,300 for the 2020/21 tax year.
Any gains realised within this allowance will be exempt from tax. When you are liable for CGT, if you are a basic rate taxpayer, you will pay 18% on second properties, and 10% on other assets. If you are a higher rate taxpayer, you will pay 28% and 20% respectively.
If the government is looking at how to increase its tax revenue from CGT, there are three main options available:
- Increase rates, potentially to bring them in line with income tax rates.
- Reduce allowances, possibly reducing the current £12,300 capital gains allowance.
- Bring assets that are currently exempt into scope, such as primary residences or removing the CGT uplift on death.
It is important to remember that a review of taxes does not always result in tax increases. As we saw in July 2019, when the results of the Inheritance Tax review were published by the OTS they were largely unacted upon. Whilst we don’t know the Chancellor’s exact motivations for the CGT review, it is something we will watch closely.
Pension tax relief
Pension contributions are a tax efficient way to build savings for your retirement.
When paying into your pension, you receive basic rate tax relief on top of your contribution. So, for every £80 you put into your pension, this will be grossed up to £100.
If you are a higher or additional rate taxpayer, you can claim any additional tax back via self-assessment (an extra 20 or 25% on top of the 20% already received).
There is an argument that says the current system is unfairly weighted to the higher earners with more tax relief going to higher rate rather than basic rate taxpayers.
The pension tax relief system costs the Treasury almost £40bn a year and in February this year it was reported that former chancellor, Sajid Javid, was looking to make the system fairer for those on lower incomes, by cutting high earner's relief to 20 per cent and (or) creating a flat-rate tax relief system for everyone.
Only time will tell if there will be any major changes to pensions tax relief in the autumn, but changes to pensions legislation is a topic that comes up regularly.
There has been a lot of talk about the introduction of a ‘wealth tax’. This is essentially the idea of shifting more of the financial burden on the wealthiest in society through the means of a tax on all wealth, including property.
Such a tax does not currently exist in the UK, however there are many examples of wealth taxes in other European countries, for example in Norway, France and Spain.
A UK wealth tax could take account of property, but there are complications. Property values are a matter of much variance (and dinner party conversation) and as such a wealth tax is difficult to calculate. Linking wealth tax to council tax bandings, which are already based on property valuations, is a current topic of debate.
Council tax is a tax on domestic property, introduced in 1993 and the main source of taxation income to councils in England where every property is allocated to one of eight tax bands. The higher the value of the property, the higher the tax band to which it is allocated.
This allocation is based on the deemed value of the property in 1992! Given the significant changes to property values over the past 28 years (318% according to the Nationwide House Price Calculator), the council tax system appears to be incredibly outdated and ripe for revaluation.
The historical valuation system used for council tax bandings is an issue for the purpose of wealth taxation, as the potential for the wrong tax rates to be applied is a concern. Revaluation of properties could happen to modernise the system, and therefore changing the bandings which are applied to some properties.
This would likely increase council tax rates dramatically in some parts of the country, for example in Central London.
Generally, a wealth tax is hard to calculate and collect. This option seems like a wildcard given there are other simpler methods for the Chancellor to raise revenue. It does however highlight the potential for other tax reforms in the future.
Please note: The financial conduct authority (FCA) does not regulate tax advice.
You don’t need to wait to take advantage of today’s tax rates and allowances
What is clear is that the relatively benign tax rates we have today will almost undoubtedly change and taking advantage of the tax allowances currently available to you is seldom a bad idea.
If you’d like to speak to a chartered independent financial adviser about your own financial situation, why not get in touch to see if we can help.
We’re currently offering anyone with £100,000 or more in savings, investments or pensions, the opportunity for a free cash flow retirement review worth up to £500.