At the time of writing in September, one of the biggest UK headlines seen during the month was Chancellor Rishi Sunak’s announcement that the public should “expect tax rises” in the near future, to help pay down the huge public debt accrued during the lockdown months.
The Budget in March rolled out a swathe of generous financial support measures to help businesses, workers and the wider economy muddle through many months of intense social isolation and distancing. Whilst many of these measures (e.g. the Job Retention Scheme) have been widely welcomed, they have also played a big part in putting the UK in its current dire position of owing £2tn in public debt (source: FT) – a figure which now surpasses the GDP of the entire country.
Broadly speaking, this leaves the UK government with at least three options. The first is to keep the current level of spending which is widely seen as unsustainable. The second is to cut public spending to try and “balance the books”.
This seems more plausible, but could come at a high political cost for Boris Johnson’s administration which has promised an “end to austerity” over the five years of this Parliament.
This leads many pundits to speculate on the third possibility – that the government could introduce a range of tax hikes to help rebalance the economy.
If #3 is the anticipated outcome in the months ahead, what form might these tax rises take? And how can you prepare, to ensure that your finances aren’t disproportionately affected?
Financial planning and tax rise speculation
At this point, it’s important to remember that no financial adviser has access to the Chancellor’s innermost thoughts or inner machinations of the UK government. It’s therefore crucial not to assume that certain taxes will inevitably rise this autumn. Yet it is possible to make informed judgements about some of the likely scenarios based on the available landscape.
First of all, whilst the UK Government enjoys a large majority of 80, Conservative backbenchers have widely reacted angrily to the possibility of tax rises in the autumn. This is likely to act as a significant check upon a significant increase across multiple taxes. Secondly, around two-thirds of the UK’s tax revenues can be traced to national insurance, VAT and income tax. If, as the IFS expects, around an additional 2% of national income needs to be raised, then it seems likely that these three taxes will be in the spotlight as we move into autumn.
What might this 2% look like?
Here, advisers such as ourselves can only speculate. A 2-3% increase in income tax on the basic rate might be possible. It could also be that tax relief on pensions for higher earners might be reduced (e.g. from 40% to 20% - in line with basic rate tax relief). One of the more likely outcomes, however, is that capital gains tax (CGT) could be raised to match the income tax brackets. There is precedent for this, as it was the CGT situation during the Thatcher years of the 1970s and 80s.
Given the wide range of possibilities, what can you do to minimise your exposure to possible tax rises in the near future?
The first important step is to not panic or act impulsively. Speak to your financial adviser about any concerns or ideas you might have and take time to reflect properly on the range of options before you. On the other hand, tax changes announced in the Autumn budget may well take immediate effect rather than waiting until the end of the 2020-21 financial year. As such, be careful not to put off the decision to seek professional financial advice if you think you might be affected.
One notable area you may wish to discuss with your adviser is CGT, since these are currently at historic lows. Should CGT rise in the autumn, it may be prudent to sell certain assets now (and possibly take a small tax hit in the short term) rather than put off this decision until later. Be very careful, however, to assess this idea with your adviser. Some or many of your investments may be best held onto, depending on your individual financial goals and situation.
This blog was originally published in the October 2020 edition of In Focus