The world may be attempting to return to normal, but like the virus itself, the financial effects of the coronavirus are stubbornly refusing to go away.
These effects have been dramatic. With lockdown bringing the country to a halt for three months, Britain’s economy shrank by a record 20% in the second quarter, the largest decline of any major economy.
On the plus side, there have been signs of a bounce-back, but government spending on job retention and business support will need to be paid for. With tax revenues down thanks to depressed economic activity, tax increases are looking increasingly inevitable. In fact, some reports suggest that the largest tax rises in a generation may be being considered.
At Continuum we are looking at what these might be – and whether there is anything you can do to keep your own tax bill under control.
What exactly is being planned?
Earlier this month, the Chancellor, Rishi Sunak hinted at tax rises to pay for the massive Government borrowing that has helped fund the fightback against the pandemic but which has led to the national debt topping £2 trillion for the first time.
Government borrowing of over £150 billion in just four months has funded emergency measures – which the Chancellor said had helped support millions of jobs. In an interview, he warned that ‘difficult decisions’ lay ahead.
According to reports featured in the Sunday Times on August 30th, Chancellor Sunak has tasked treasury officials with drawing up plans for a £30bn tax raid on the wealthy, on businesses, pensions and on foreign aid to plug the hole in the nation’s finances caused by the coronavirus crisis.
Under proposals that are due to form the centrepiece of the budget in November, the government is planning to raise both capital gains tax and corporation tax. The proposal for Corporation tax is a hike from 19% to 24%, with the intention to raise £12 billion next year and £17 billion in 2023/24.
The proposal for capital gains tax may require people to pay tax on their capital gains at the same rate as they pay income tax. This would place a large additional burden on small businesses, and involve people who own second homes and buy-to-let properties paying capital gains tax at 40% or 45% as opposed to the current 28% when they sell.
Treasury officials are also said to be looking at slashing billions from pensions tax relief which assists those persons making pension contributions to save for their retirement. Under current rules, tax relief is paid on savers’ pension contributions at the rate of income tax they pay, and income tax paid on the benefits.
But the proposals would cut in half the 40 per cent relief enjoyed by an estimated four million taxpayers, effectively increasing their average tax rate.
Other proposals have included a revamp of inheritance tax and an introduction of a digital sales tax, to ‘address the balance’ between online retail giants like Amazon and independent High Street businesses crippled by the Government’s Covid-inspired lockdown.
The Chancellor is also reportedly targeting the foreign aid budget to find extra cash, repealing legislation that states that the UK must pay 0.7% of national income on overseas aid. Rises to fuel and other duties may be being considered.
The tax moves are likely to spark a furious reaction from those affected. Businesses still reeling from the impact of the pandemic have been among the first to voice their opposition. Many other interested groups, from those saving for their pensions to second homeowners can be expected to be up in arms.
However, although the moves may be seen as inevitable by the treasury, the Prime Minister seems to be among those against them. No 10 was putting up fierce opposition to the tax-hike plans, with some officials demanding to know why reducing Whitehall departments’ spending was not being considered instead.
Boris Johnson’s aides may fear conducting a major tax raid risks derailing the economic recovery – but even if the proposals are watered down by Number 10, the parlous state of the UK’s finances makes it look likely that some tax hikes will be inevitable.
What can you do?
If tax hikes are inevitable, it makes good sense to start looking at what you can do to minimise your exposure. Ensuring that you make full use of measures such as ISAs to protect your wealth from the taxman are obvious, but the complexities of the tax systems are such that having expert help is essential. If you want help in reducing the effect any potential tax increases may have on your money, you may need to call on the expertise of the Continuum team.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.
Your capital is at risk, you may get back less than you originally invested