The stability of a new government with, as it stands, a sizeable majority would ordinarily bring about an air of initiative and decisiveness.
However, we appear to occupy a state of limbo at the moment, as we await further details of the governments tax and budgetary policy.
As a result it’s a tricky time for us on the ground, to make key decisions about our lives around things like asset sales, capital purchases, career direction, pension contributions and trading status.
I thought in this note, I would speculate for a moment on what the Government might announce on October 30th, the date set by Rachel Reeves for the first Autumn Statement and OBR Forecast under the new Labour Government.
First a bit of context
We know that this budget will contain tax rises and/or spending cuts. The reason we know this is, following a recent Treasury audit, the chancellor revealed an apparent £22bn ‘black hole’ in the spring statement laid out by Jeremy Hunt, the previous Conservative Chancellor.
Out of curiosity I had a delve into what gives rise to this figure and it consists of broadly two (very sensitive) components. 1) did we allow for public sector pay increases in excess of 2%, and 2) did we properly budget for the ever spiralling costs of asylum. In both cases the answer was no.
Irrespective of this, we know that come the end of October, we’ll hear how the Chancellor intends to plug this gap. Lets have a look at some possible areas.
Employment taxes
This is the tax levied on your salaries, usually at source by your employers via PAYE. This would include Income tax and National Insurance.
Now I think a rate increase on either of these taxes would be very unlikely (link to my article on 24-25 rates here). Labour pledged in their election manifesto that neither of these taxes would be raised. Breaking manifesto pledges would be a big call given the pre election promises of integrity and trust.
However, the thresholds at which these rates apply may be looked at, or more precisely remain stagnant for a longer period. This is what’s known as ‘fiscal drag’, whereby a greater portion of our salary is exposed to higher rates of tax, as wages increase through inflation.
It’s stealthy and more complicated, hence why it doesn’t bring about quite the hoo-ha amongst the populous as rises in the tax rates themselves. An appealing target for any Chancellor.
Capital Gains Tax (CGT)
Should I sell or not?
Well I reckon this is the most likely area of reform. And if we can discount the chances of tax cuts, we can only assume that CGT rules will tighten through rate rises, threshold freezes/reductions and/or the withdrawal of relief.
In terms of rates, there are murmurings of ‘equalisation’ which means the potential alignment of tax rates with income tax. This would mean that the basic rate of CGT would move from 10% to 20%, and the higher rate from 20% to 40%. The current rates for investment property sales of 18% and 28% would also change, possibly maintaining the 8% premium over the standard rates.
The CGT allowance has already tumbled from £12,300 to £6,000 to £3,000 in the last 3 years so we may be looking at this trend continuing. Plenty of options available to look at things like allowable expenditure and relief such as that on property sales.
Pensions
Naturally our Government, whoever the incumbent, want us to sensibly plan for our retirements, and they incentivise this through generous tax relief on our contributions.
However, it is expensive.
I can see some scope for change here. Perhaps by:
a reduction to the tax free lump sum percentage (currently 25%) which can be drawn down on retirement, or
a reduction to the annual allowance (currently £60,000) which is the maximum total of pension contributions we can make per year before tax relief is withdrawn, or
limiting tax relief to 20% (the basic rate of tax) irrespective of whether you are a basic, additional or higher rate taxpayer
Inheritance tax (IHT)
Perhaps our biggest tool for social mobility, this tax aims to counter inter-generational wealth.
Even in terms of tax popularity, IHT is this nations punching bag. It’s poorly maintained, complex, yields comparatively insignificant revenue, and is levied on so few estates.
Scrapping IHT without reform or replacement is not a viable option. One possible way of addressing it, is to tax the recipient of the inheritance (a bit like Capital Gains tax) rather than the deceased (via the estate). Its less ambiguous, confusing, and indeed optional.
VAT
Another key manifesto pledge – no increase in the rates of VAT.
Therefore I’d expect no rate change here, with the exception of certain private education providers on which charitable relief has been removed.
Other areas
There is speculation that IR35 will be looked at. The legislation that gave the heebie-jeebies to any would-be recruiter of flexible labour, has decimated the contractor market, with much of the work moving offshore. Could this be softened.
The abolition of the Furnished Holiday Let regime, the preferential rules for expenditure recognition for holiday homes, will go ahead as planned from Apr 25
Every government promises it, but so few deliver on it. A crackdown on tax avoidance, including the clawback of fraudulent Covid claims would expect to raise an eye-watering £40bn of lost tax revenue.
I wouldn’t expect any changes to corporation tax or dividend tax. The former was subject to a recent rate rise for larger businesses, and the latter has been the target for the gradual erosion of it’s tax free allowance. Any changes in either area is a sure fire way to stifle growth.
Summary
The tax and benefit system has to be fair, it has to encourage work and enterprise, and it has to attract both domestic and foreign investment. The wrong lever, pulled at the wrong time can adversely affect any one of these things.
Raising meaningful tax revenue without targeting Income Tax, National Insurance or VAT, which contribute an aggregate 65% of the total £950bn raised, is going to be very challenging.
I believe fiscal responsibility is now a central theme for any government, with spending fully costed at all times. Indeed legislation is due to follow to prevent fiscal events such as that of the mini-budget happening again.
Improved public services and living standards comes about through growth as well as administrative efficiencies. As always it’s a very difficult balancing act.
For business owners, Limited Company Proprietorship remains the best way to operate your trade through the ability to tax strategize, retirement plan, and be protected from personal liability. However tax efficiency is less than what it was, so when making decisions around incorporation - commitment and longevity has to be the core consideration.
For the employed, there’s nothing to suggest that you will be the target this autumn. Indeed, with the unpalatable levels of ‘economic inactivity’, work has to be an appealing option.
For those applicable, I would suggest liaising with your brokers and advisors around the merits of accelerating pension drawdowns (for the retired), pension contributions (for those not retired), and asset sales (for those with assets in scope for CGT), on the assumption that tax burdens are unlikely to be relaxed.
I hope you found that useful, if you’d like to discuss do get in touch.
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