The UK Government’s budget deficit is expected to reach a peacetime high of around £400 billion this year as a result of the cost of economic support measures during the Coronavirus crisis as well as the impact of the crisis on the economy and, in turn, tax receipts. That is around seven times higher than the £55 billion deficit forecast by the Office for Budget Responsibility (OBR) in March 2020.
Meanwhile, the OBR forecasts that Government debt will increase from around 80 per cent of GDP at the start of the crisis to around 105 per cent of GDP at the end of 2020-21, with the potential to rise about 120 per cent of GDP during the first half of the decade.
As a result, speculation has been mounting in recent months that the Chancellor, Rishi Sunak, will announce significant tax rises at the Budget on Wednesday 3 March 2021.
How big could tax rises be?
The widely-respected Institute for Fiscal Studies (IFS) warned back in October that just to bring borrowing down to £80 billion a year and debt down to 100 per cent of GDP would require tax rises of around £40 billion a year by the mid-2020s. That is equivalent to more than three-quarters of the Government’s entire receipts from Corporation Tax last year or 20 per cent of receipts from Income Tax.
The IFS figures are also based on the assumption that 75 per cent of the cost of the crisis will fall in the 2020-21 tax year. If that proves not to be correct, the required tax rises could be significantly higher.
When can we expect tax rises?
In its October report, the IFS says that neither tax rises nor cuts to public services should be considered in the next 18 months, arguing that the priority should be supporting the economy.
However, politically, it may be appealing to the Chancellor to begin raising some taxes sooner rather than later to reduce the headline figures for tax rises at future Budgets.
As a result, there is significant uncertainty about whether the 2021 Budget will contain significant tax rises, but a high level of certainty that tax rises will be announced in the coming years.
Additionally, The Financial Times reports that a second Budget is expected in the autumn and it is possible that key decisions will be left until then.
What tax rises could we see at the March Budget?
There are a lot of options open to the Chancellor – some of which more likely than others – as he considers what to do in March, including any combinations of:
- Keep things as they are;
- Increase tax rates on any combination of taxes;
- Reduce tax rates on any combination of taxes;
- Introduce new tax bands;
- Remove existing tax bands;
- Increase tax thresholds;
- Reduce tax thresholds;
- Extend tax reliefs and allowances;
- Limit tax reliefs and allowances;
- Increase the value of tax reliefs and allowances;
- Reduce the value of tax reliefs and allowances;
- Restructure or redesign existing taxes;
- Introduce new taxes.
Complicating matters further still, any tax changes could be announced with immediate effect or to take effect at some point in the future.
The sheer number of options open to the Chancellor mean that predicting what will be in the Budget is hugely uncertain. However, we can get an idea of which might be more likely than others from press reports based on information from well-informed sources.
One caveat that could limit the Chancellor’s options is commitment in the Conservative manifesto ahead of the 2019 General Election not to raise the rates of income tax, National Insurance and VAT. However, a manifesto commitment is not legally binding and the Chancellor could argue that an unexpected challenge of this scale means it is proportionate to discard these commitments.
Capital Gains Tax
In November 2020, the Office for Tax Simplification (OTS) published a report into Capital Gains Tax (CGT), which recommended that the ministers consider bringing it into line with Income Tax in a move that would approximately double the amount owed on any given transaction.
It is also possible there could be changes to the annual exemption or Business Asset Disposal Relief (formerly known as Entrepreneurs Relief), with the possibility that Business Asset Disposal Relief could be scrapped or modified significantly.
However, few national papers have trailed changes to CGT as a possibility in recent weeks.
The Times reported on 18 January 2021 that the Chancellor is considering increasing Corporation Tax. Corporation Tax is currently at historically low levels, having fallen from 28 per cent in 2010 to 19 per cent now.
Whether such an increase comes to pass may depend on the continued success of the vaccine programme and how long the current lockdown lasts.
Replacing Council Tax and Stamp Duty with a new Property Levy
The Mail on Sunday reported on 17 January 2021 that the Chancellor is considering a plan to replace Council Tax and Stamp Duty Land Tax (SDLT) with a new national property levy, based on current values.
However, the report says that such a change would not be imminent.
Extension of Stamp Duty Holiday
The Sunday Times reported on 17 January 2021 that the current increase in the SDLT threshold to £500,000 will be extended. However, reports elsewhere say this will not be the case.
Reduce Tax Relief on Pension Contributions
The Daily Express reported on 7 January 2021 that tax relief on pension contributions could be limited at the Budget.
Introduce a Wealth Tax
An independent commission established last spring by the London School of Economics, the University of Warwick and the Economic and Social Research Council to analyse proposals for a wealth tax has rejected an annual tax but has advocated a one-off charge, saying:
“A well-designed one-off wealth tax would raise a total of £260 billion at a rate of five per cent over £500,000 per individual or £80 billion at a rate of five per cent of £2 million per individual, payable at one per cent per year over five years.”
While the Chancellor has rejected a wealth tax, the potential revenue could tempt him into a u-turn. Any such tax would likely be implemented immediately and without warning to prevent planning.
The content of the 3 March 2021 Budget is amongst the most uncertain for years and it is important to take account of your whole tax position in preparing for the possibility of tax rises this year or in future years.
Please contact us today to find out how we can help you plan for tax rises in the Budget.