UK Government Faces Tough Choices on Tax Increases
The British government is grappling with a £22 billion shortfall in public finances, prompting discussions about potential tax hikes in the upcoming October Budget. Chancellor Rachel Reeves has already taken some options off the table, ruling out increases in Value Added Tax (VAT), income tax, and National Insurance for working individuals. This leaves policymakers searching for alternative revenue sources.
Stealth Tax
One possibility is the implementation of a "stealth tax." This approach doesn't introduce new taxes but instead manipulates existing tax structures. Paul Johnson, who heads the Institute for Fiscal Studies (IFS), suggests that extending the current freeze on income tax and National Insurance thresholds beyond 2028 could be a viable option. This strategy leverages "fiscal drag," where inflation and wage increases push more people into higher tax brackets without explicitly raising tax rates.
The Resolution Foundation, a think tank focused on improving living standards, estimates that the existing freeze could generate around £40 billion by 2028. James Smith, the foundation's director, believes this alone might suffice to address the budget shortfall.
Another potential target is Capital Gains Tax (CGT). This tax applies to profits from asset sales, including stocks outside ISAs and second homes. Current rates start at 10% (18% for residential property) on profits above £3,000, rising to 20% (28% for residential property) for higher earners. Some argue that increasing CGT rates or reducing business tax breaks could help level the playing field with income tax. However, business groups warn that such moves could hinder economic growth and entrepreneurship.
Reducing Pension Relief
Pension tax relief is another area under scrutiny. This system allows individuals to receive tax breaks on pension contributions. Under the current system, savers receive tax relief at the same rate as their income tax - meaning basic rate taxpayers receive relief at 20% and higher rate taxpayers at 40 or 45%. Introducing a flat rate of relief could potentially raise billions, but critics argue it might discourage saving and prove challenging to implement.
Inheritance Tax
Inheritance tax, which currently affects fewer than 5% of estates, is also being considered for reform. The tax is levied at 40% on estates valued above £325,000, with higher thresholds for inherited homes. Possible changes include raising the tax rate or limiting relief on certain inherited assets like agricultural land, pension savings, and unquoted shares. While this could increase revenue, it's a politically sensitive issue due to the tax's unpopularity.
Summary
Each of these options presents its own set of challenges and potential consequences. The government must carefully weigh the need for increased revenue against the broader economic impact and public reaction to any tax changes. As the Budget approaches, the debate over these potential tax measures is likely to intensify, with various stakeholders advocating for their preferred approaches. If you have any queries or are worried about how the upcoming budget might affect you and your business then get in touch today!
