It’s approaching that time of the year again, the one where we all gather round in anticipation to find out what presents will be coming out of a red carry case. Yes, it’s less than two weeks from now, just 12 sleeps till budget day.
Ahead of last year’s feverishly anticipated budget we wrote this blog undertaking some educated guesswork about what may or may not be coming down the track and what if anything we should be doing about it. And without wishing to toot our own horns, this guesswork turned out to be fairly good.
So here we are 13 months later, having had a “one-off” budget to fill black holes we now have another budget approaching which we’ve been warned will need to include tens of billions of fiscal hole filling tax rises. So after hubristically patting ourselves on the back for a job well done last year, we’re setting ourselves up for a fall* by having another stab at what we think Father Christmas Rachel from Accounts will and won’t be bringing us this year, no matter how nice we’ve been.
* and given they don’t seem to know what they’re going to do yet, it does seem somewhat harder this year.
The Options for Tax Rises
- Income Tax
- Capital Gains Tax (CGT)
- Pensions
- Inheritance Tax (IHT)
- Property Taxes
- Other Options
Once again there has been some murmurings about new wealth taxes, but again we think this is very difficult to implement well in reality and that raising and reforming existing taxes is far more likely.
Income Tax
This section of the blog was ruined this morning by the news of a U-turn on plans to raise income tax by 2%. I was even planning to say something vaguely nice, acknowledging it would be a surprisingly brave (and honest) way of dealing with serious problems. Scrap that.
After the Chancellor strode out of Downing Street with her diary visible and only showing the word “Thresholds” a few weeks ago, there have also been rumours of the higher rate tax threshold being reduced. Tax thresholds will almost inevitably be frozen for another year.
An increase in the basic rate of income tax on dividends looks like a contender to us too. At 8.75% it’s far lower than the standard income tax rate and the effective rate of tax on drawing dividends (at basic rate) is still noticeably lower than taking a salary for business owners.
Capital Gains Tax (CGT)
The tax rise that everyone knew was coming last year turned out to be lower than expected, with higher rate CGT going up just 4%, from 20% to 24%. Basic rate CGT increased more meaningfully, jumping from 10% to 18%.
The Chancellor had previously ruled out raising the rate again, but on the back of the income tax U-turn we’re not sure this means anything. We wouldn’t be surprised to see a few more percent added to higher rate CGT, perhaps another 4% to re-establish the 10% differential between the basic and higher rates. It’s not going to make a huge dent in a £30bn black hole (or is it now £20bn?), but every billion here or there helps.
Uplift on Death
Currently, a deceased’s estate is deemed to acquire assets at the value on the date of death, wiping out capital gains – as such, CGT can be avoided by holding assets till death.
This is something we’ve been concerned about being removed ever since the now disbanded Office for Tax Simplification (OTS) repeatedly recommended it several years ago. So far it hasn’t come to pass, but is now apparently being considered by No 11 (although just about everything is by the sound of it).
Pensions
This was the big one last year, everyone’s focus was on cuts to tax relief and lump sum entitlements. As it happened, pensions did see the biggest change to personal taxes (i.e. excluding the huge raid on employer NICs), but it came in the form of pensions becoming subject to Inheritance Tax (IHT) from April 2027.
For all the reasons we set out last year, we again think removing higher and additional rate tax reliefs on contributions is very unlikely. It does however sound like a different, last drastic, route will be taken to reducing the cost of pension contributions to the exchequer (see below).
Cuts to pension lump sum entitlements seem less likely than last year; possibly due to the fact that the amount of tax raised (£2bn from a reduction to £100k according to the Fabian Society) wouldn’t be that great compared to the sheer amount of Telegraph hand wringing (who have stated Treasury officials have told them it won’t be cut this year).
Salary Sacrifice / NI charges on Employer Contributions
When you personally contribute to a pension you get income tax relief on the amount paid in, but your National Insurance Contributions aren’t reduced. If instead of contributing personally, you take less salary and your employer contributes to your pension (salary sacrifice), both your and your employer’s National Insurance contributions are reduced. Rumours have surfaced that these arrangements will be targeted with additional (National Insurance) charges. There would be no impact on public sector pensions, increasing its attractiveness.
Due to the way any such changes would directly impact company payroll operations, an immediate overnight change would seem unlikely. A change as of the 6th April would seem more plausible (possibly with countermeasures for those who try to go big with salary sacrifices in the meantime).
Inheritance Tax (IHT)
At the risk of further self-congratulation, we absolutely called this one last year. No changes to rates or allowances, but Pensions, Business Relief, Agricultural Relief all hit – the latter probably giving the government more flack than anticipated.
Again, given the huge unpopularity of the tax, the fact the headline rate (40%) is fairly high and reducing allowances would bring middle-class families (as opposed to the very wealthy) within the scope of the tax, we’re not expecting changes to the main rate or allowances.
The big, bold option would be a wide-ranging reform of the whole system (as proposed years ago by the OTS), flipping the tax burden on the recipient, rather than donor. However, given the complexity of such reform and the rushed time frames these budget decisions appear to be being made in, it seems odds against that this will happen. Maybe a good old-fashioned consultation will be launched.
More subtle, modest tax raising adjustments could come in the form of increasing the 7-year period a donor needs to survive a gift for it be outside their estate and increasing the rate of tax paid by trusts (periodic and exit charges). The most likely change would be axing the complex and not widely used “normal expenditure out of surplus income” exemption.
Property Taxes
There have been rumours that the government will grasp the nettle of property taxes. There’s no denying the current system is an absolute mess. Huge Stamp Duty bills create undesirable frictions in the economy as people are put off moving (e.g. to move jobs or downsize) and Council Tax is based on ridiculous notional valuations that no longer have any basis in reality and results in multi-million-pound homes in Westminster paying less tax than cheap terrace houses in other parts of the country.
The solution would be to replace both of these taxes with a single annual property tax based on the value of a property. However …
- Stamp Duty is a drug the treasury will struggle to kick – the methadone dosage of annual property tax would need to be high to avoid withdrawal symptoms / fiscal black holes.
- Are those who’ve just paid tens of thousands of stamp duty simply told unlucky you paid that before it was axed, please also now pay large amounts of annual tax as well. And if not, see the point above.
- How do you actually value properties for this annual tax in 2025 – it’s the same problem council tax has now.
- Are cash poor owners of large houses given an option to pay later, or are they simply told to find a way or sell their homes. If pay later options are offered, see the first point.
All of which is a long-winded way of saying we’d be surprised if it happened, as sensible as it would be for the long term. The most likely route would appear to be simple, potentially large hikes in council tax for the top bands.
Another consideration is a return to a version of a previous Labour idea of a “Mansion Tax”, possibly by applying a tax (Capital Gains Tax) to sales of high value properties, regardless of whether it is a main residence.
Other Options
VAT
An increase in the headline rate would seem unlikely, at 20% it’s already one of the highest sales taxes in the developed world. There are however myriad exemptions that could be removed or amended, just as long as one of them isn’t investment intermediation mind …
We also hope rumours of drastic reductions in the VAT threshold for businesses are nothing more than that, as this would surely be terrible news for economic growth given the burden that would be placed on small businesses.
Road Pricing
A topic that’s cropped up in the press in the last couple of weeks. As drivers transition to electric vehicles, fuel duty receipts will drop, leaving a key source of revenue to be replaced. Hopefully, the rumoured farcical system of EV drivers having to guess future mileage and pay tax on that doesn’t transpire – it shouldn’t be beyond the whit of 21st century technology to implement road pricing / tolls properly. The idea of road pricing also ignores the fact that Road Tax (i.e. VED) already exists and the taxes levied on fuel are far in excess of what is spent on roads and buses.
Conclusions
It seems the pattern being set is one of a myriad amount of smaller tax rises (as opposed to dealing with most of the issue through a modest increase in income tax). There will undoubtably be tax rises for many; but hopefully these will not be to the extent of significantly impacting financial plans.
In terms of planning action now, Martin likes to use an analogy from motorsport; ‘be on the right tyres for the conditions’ i.e. change according to the conditions at the time, don’t be on the wrong tyres in the hope of the weather changing.
For most of our clients, it is a case of waiting to see what the budget will bring and adapting accordingly. Making strategy changes now on what may or may not happen is unlikely to be sensible.
If you would like to discuss any of the issues raised or need any help reviewing your wider financial picture, please don’t hesitate to get in touch and we’d be happy to see if we can help.
Disclaimer
The above is provided for general information only. No action should be taken without seeking advice for your specific circumstances. Collingbourne Wealth Management Ltd does not provide tax advice. All information is based on our understanding of current tax rules as at the time of writing, which is subject to change.