The government “cannot carry on doing exactly what we did this year forever,” The Chancellor has recently stated in relation to helping the UK economy through the next stage of the COVID pandemic. Speaking after a meeting with the 2019 intake of Tory MPs, Rishi Sunak said the UK needed “sustainable public finances”, but in the short-term it was focused on “protecting and supporting jobs”.
The UK Government has provided huge and welcome support to businesses and individuals to help, as far as they can, over this recent torrid period. The total estimated cost of this support is predicted to be around £330bn by the end of the April 2020-21 tax year according to the Office for Budget Responsibility (OBR).
In his next Budget, currently due this Autumn, it would appear that Mr Sunak may be considering an array of tax rises, which many people have referred to as ‘wealth taxes’, including possible cuts to pensions tax relief for higher earners and increases in capital gains tax and fuel duty.
Here are some key areas that are worth considering:
Abolishing higher-rate tax relief on pension contributions has long been discussed. Higher rate taxpayers currently receive tax relief on pension contributions at 40%. In the March budget, around the time the COVID pandemic was starting to seriously impact on the UK, The Chancellor actually relaxed the rules on how much higher earners can save into their pensions while receiving tax relief. This could well be reversed as quickly as it came.
Most individuals, in addition to their current Annual Pension Allowance, also have the ability to carry forward pension contributions from previous tax years. Could this be another area that The Chancellor could review?
The subject of further IHT reform has been on the agenda now for a number of years. Could we now be expecting a further tightening up on this area rather than any beneficial changes?
Many business assets, including farmland, can currently be excluded from the calculation of taxable wealth, lowering the charge even further for many wealthy households. No 10 is reportedly considering including those assets in the inheritance tax remit.
The Chancellor had signalled that the self-employed would have to pay higher levels of National Insurance when he announced an £8bn scheme to help them weather the downturn back in May. He stated at the time “It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”
Currently, the self-employed pay 9% NICs compared to 12% by an employed person. Part of the difference is justified by not being eligible for certain state benefits that can be claimed by an employee. A previous attempt to increase the NIC rate for the self-employed was withdrawn following lobbying and complaints that it breached an earlier manifesto pledge. This may well now be the time for this change to be finally implemented.
Rishi Sunak also instructed a review in July of how to potentially reform the capital gains tax regime.
This could mean that second-home owners could be hit under proposals to require people to pay capital gains tax at the same rate as they pay income tax. That would involve people who own second homes and buy-to-let properties paying capital gains tax at 40 per cent or 45 per cent as opposed to the current 28 per cent when they sell the properties.
In addition, could there be a further tax on dividends? It is noticeable that thus far little COVID-19 support has been provided to people operating via a limited company and taking most of their income via dividends. Any increase in NIC’s, noted earlier, may also be accompanied by an increase in the tax on dividends, as otherwise there is an incentive for more businesses to convert to limited companies.
Will they continue at the same level? Each individual currently has a £20,000 overall ISA allowance per tax year which has increased gradually to this level since ISAs were first introduced back in 1999. Is now the time we may start to see a different approach to this valuable savings allowance?
Whether any of the areas noted above ultimately happen is clearly still up for debate and is simply speculation at this stage, however, either October or November is not that far away now for The Chancellor to “show his hand” and to understand any immediate and/or planned changes to existing tax reliefs and allowances he plans to introduce. What we do know though is that country’s finances and books are going to need rebalancing and that a ‘wealth tax’ is clearly something which is currently being seriously considered.
At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. Our guidance for anyone considering taking advice in any of the above areas is that now would be a good time to do so, ahead of the forthcoming budget, whilst all existing reliefs and allowances remain available for those who are in a position to take action.