The second Budget of 2020 could mark the start of a round of tax increases.
When 2019 passed without a Budget, it seemed an unusual year. 2020, already out of the ordinary, will more than make up for it with two.
The first Budget of 2020 took place on 11 March, the day that the World Health Organisation declared Covid-19 a pandemic. At the time, the Office for Budget Responsibility (OBR) calculated that the UK government would need to borrow around £55bn in 2020/21. By mid-July, the OBR updated its projections, and that estimate rose to £322bn – almost six times the original figure.
No government can continue to borrow at such a rate and many economists regard the autumn Budget as the moment when the brakes will start to be applied. The Chancellor is somewhat constrained by his party’s 2019 election manifesto pledge not to increase income tax, National Insurance contributions and VAT rates.
However, as his predecessors have consistently demonstrated, there are many ways to increase tax that do not involve changing the rates. In particular, three areas of reform are already being considered.
The gross cost of income tax relief for pensions has been put at over £37bn by HMRC in its latest figures (for 2017/18), with a further £16.5bn for employee and employer National Insurance contributions relief.
The government launched a consultation in July 2020 on a technical aspect of pension income tax relief, a move that could be a precursor to a broader reworking. A flat rate of tax relief for all pension contributions has long been argued over by a variety of stakeholders.
In the March Budget, the Chancellor added to the cost of pensions tax relief by relaxing the annual allowance rules. There is a now a distinct possibility that, in his next Budget, the Chancellor could try to claw some money back by reducing tax relief for higher and additional rate taxpayers.
A report was commissioned over two years ago by the then Chancellor, Philip Hammond, on simplifying inheritance tax (IHT) from the Office of Tax Simplification (OTS). The OTS issued two reports, but no action was taken in the subsequent Budgets.
Matters may be different, come autumn 2020. Recent statistics from HMRC show that last year IHT receipts fell for the first time since 2017/18. The drop is possibly attributable to the impact of the Residence Nil Rate Band (RNRB), introduced in April 2017. The OTS reports did not make any recommendations about the RNRB on the grounds that it had only just come into being, but it did note widespread criticism of its complexity.
A Chancellor with an eye towards a ‘levellingup’ agenda and a need for more revenue could pick and choose from the recommendations in the OTS reports to collect more IHT.
CAPITAL GAINS TAX
Out of the blue, the Chancellor gave the OTS another tax review to undertake in mid- July 2020. Capital gains tax (CGT) was the subject and this time there was less emphasis on simplification and more on ensuring ‘the system is fit for purpose’.
There’s a real possibility that CGT rates will once again be aligned with income tax rates, which could see the top CGT rate increase from 20% (28% for non-exempt residential property) to 45%.
Ahead of the autumn Budget, there are mitigating measures that could be taken in any of the three areas mentioned here. However, pre-Budget tax planning requires advice to avoid unnecessary or inappropriate actions. Get in touch if you’d like to discuss your financial planning.
The levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.