When chancellor Rishi Sunak delivers his Budget next week he will be walking a fine line between supporting a fragile economic recovery and tackling a sky-high deficit, but what does it mean for your money? Here’s what you can expect.
The coronavirus pandemic forced the government to take extreme measures to prop up the economy, with furlough schemes, loans, and bailouts of individuals and business, which has pushed the UK’s overall debt to its highest levels since the 1960s.
Debt now stands at 99.4% of GDP – or £2.13tn – and borrowing in January reached its highest level since 1993 as the government added another £8.8bn to the bill.
The problem is, despite the borrowing and spending by the government, the UK economy is still far from recovered and RSM UK senior tax partner George Bull said the the economy has never faced such a stark challenge.
‘Support has arguably only deferred the worst impacts [of the pandemic],’ he said. ‘The UK may yet face the harshest time if support is removed prematurely…The chancellor must address two key questions [in the Budget]: have these stimulus and support measures been sufficient and when will they have to end? The decisions announced in the Budget will have far-reaching effects well beyond the next election in 2024.’
When Sunak stands up to deliver the Budget on 3 March, he will have to decide whether to raise taxes to balance the deficit or further support consumers and jobs until the economy is on a surer footing.
RSM UK’s tax experts have looked into their crystal ball to predict what changes Sunak will make this long-awaited Budget day:
A survey by Sheffield University found that 50% of the population would be happy to pay more personal tax provided they believe in what the money is being used for and the poorest aren’t hit hardest.
Bull said while this more socially minded attitude may ‘give the chancellor more room to manoeuvre’ in the Budget, ‘many people are keen to see tax increases provided they don’t have to pay for them themselves’.
Chris Etherington, a specialist in personal tax, said the Budget has come to soon – despite being deferred last year – and Sunak will be focused on the wider issue of coronavirus.
‘Rather than the Budget being a blockbuster event, this will be a trailer for it,’ he said, as Sunak will be prevented from changing income tax or national insurance rates in line with the Conservative manifesto.
Adding a penny on the pound to the income tax rate would reap a £4.5bn a year gain for the Treasury but ‘they can’t do it’, Etherington said. Sunak could make a target of self-employed workers, though.
Etherington said self-employed workers pay less in national insurance as, historically, they have not been able to claim the same level of benefits as employed workers. However, this has changed during the pandemic, with self-employed people benefiting from bailouts.
‘Having received support and been on a similar footing to employed workers could lead to increased national insurance for them,’ he said.
‘Addressing the disparity [between national insurance rates] has been on the agenda for a long time at the Treasury.’
Capital gains tax (CGT) is also considered low-hanging fruit for a Budget increase. Currently CGT is charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers but a shake-up could be underway.
Etherington said CGT has become a ‘hot topic’ following a review by the Office of Tax Simplification, which recommended aligning CGT with income tax rates, the highest band of which is 45%.
However, the OTS’s first report was ‘fast-tracked’ and consequently Sunak is unlikely to make any changes to CGT, Etherington suggested.
‘CGT is a voluntary tax and if rates increase in line with income tax it will be difficult to predict what the revenue increase will be,’ he said.
‘40% of CGT revenues are paid by 1% of CGT payers who have gains of £5m or more. It is a very important minority that may sit on their assets rather than suffer a liability. If you push too far, it may result in a lower tax from CGT.’
While a CGT hike is seemingly off the table, Sunak may have ‘a wild card up his sleeve’ in the form of a wealth tax.
‘It was previously dismissed last summer but one policy that could aid the deficit in one fell swoop is a wealth tax,’ said Etherington.
He said an ‘emergency’ tax, akin to post-war taxes, could be brought in in the form of a ‘one-off wealth tax’ that would see a 1% charge on assets over £500,000, potentially generating £260bn of revenue for the country.
‘It’s anathema to the Conservatives but arguably they are playing to a different gallery with a red wall of voters who are unlikely to be the target of [a wealth tax].’
However, Etherington warned that ‘one-off’ taxes have a habit of sticking around: stamp duty was originally supposed to be a one-off.
One of the economic stimulus measures brought in to counter the economic destruction of the coronavirus pandemic was a stamp duty holiday, which kept the housing market buoyant and prevented a crash in house prices.
Although it was supposed to end on 31 March this year, Sunak is reported to be set to announce a three-month extension to the end of June in the Budget.
The extension to the holiday, which cuts the tax entirely for property transactions between £125,000 and £500,000, could benefit up to 300,000 property purchases and provide tax breaks to homebuyers caught up in the backlog of transactions caused by multiple lockdowns.
Etherington said an extension would be a ‘pragmatic and sensible step to take’ and when the March deadline was announced no-one expected the country would still be in such a severe lockdown.
Rather than ‘risk a correction [in the housing market]’, Sunak is expected to ‘safeguard transactions in progress or set out a phased withdrawal, easing the burden on those working in property’.
The chancellor could be minded to go one step further and ‘heed recent calls to abolish stamp duty and council tax’ in favour of a property tax, said Etherington.
The Fairer Share campaign calls for stamp duty and council tax to be scrapped in favour of an annual flat rate property tax of 0.48% of a property’s value. This means the owner of a £200,000 house would pay £960 a year.
Bull was sceptical that such as monumental change could be enacted, and called it a ‘political change as much as an economic and tax change’. He said local authorities have the ability to increase council tax but very few do so by more than normal rates due to electoral reasons.
‘Years ago I worked with HM Revenue & Customers on assessing how a property tax would work,’ he said. ‘It is very complicated and certainly not an easy tax for the government to change.’
The Covid-19 outbreak and consequent debt accrued may lead to a major rethink of taxes. As the world becomes more environmentally and socially conscious, now may be the time to introduce carbon- and climate change-based taxes.
‘Recovering from Covid-19 while addressing climate change provides an opportunity to reform tax policy and create a system that is fit for purpose and meets the needs of the population, businesses, and the government,’ said Bull.
Part of this will be how the government can ‘move from money-based to carbon-based taxes’.
Sarah Halstead, a VAT expert at RSM UK, said Brexit will allow the UK to change the rates paid on energy-saving products such as insulation and solar panels, where the VAT could be reduced to just 5%.
‘The EU departure will allow [the UK]…to expand environmental taxes to increase carbon taxes and it leaves the field wide open,’ she said. ‘We could see more polluter-pays taxes, such as a fixed amount per tonne of carbon emitted.’
UK businesses currently enjoys a historically low corporation tax rate of 19%, a tax that has been reduced by a third over the past 10 years.
Dan Robertson, a corporation tax expert, said although the overall rate has been falling, the corporation tax take has stayed the same.
‘This reflects a competing object that any chancellor faces at Budget time,’ he said. ‘They want to make the UK an attractive place to invest in and support businesses through the pandemic but they also need to maintain corporate tax income.’
Robertson said there may be some tinkering around the edges, with a reduction in the amount of losses companies can get relief on, but there may be better news for small businesses.
He predicted Sunak could reintroduce small company rates of corporation tax, which were available prior to 2015 and allowed small businesses to pay lower rates of tax than their larger counterparts.
‘We may see that reintroduced,’ he said.
Reports today suggest that the government could also freeze the ‘lifetime allowance’ (LTA) for pension pots, the amount above which savers face punitive tax penalties.
The lifetime allowance is currently £1,073,100 and it rises by the rate of inflation each year. Simply freezing the LTA would be worth £250m to the Treasury’s coffers, and would additionally see 10,000 people pay an additional £22,000 in tax on oversized pension savings by 2024.
The government has shied away from cutting pension tax relief for higher earners and it is understood that this is still off the table.