In just over a week’s time, the Chancellor Rishi Sunak will stand up in the House of Commons to deliver his autumn Budget.
With national debt at almost 100% of GDP, a growing budget deficit, and the economy continuing to face supply side issues and rising inflation, the Chancellor finds himself in an unenviable situation. The economy is still smaller than it was pre-pandemic, and so while Sunak doesn’t want to spook the markets by further borrowing, at the same time he doesn’t want to choke off recovery by raising taxes and cutting spending. Indeed, he is part of a government that remains committed to higher spending on the NHS, and huge infrastructure projects, such as HS2. The Chancellor is also expected to use his Budget statement to confirm plans for a rise in core governmental spending of nearly 4% a year over this Parliament.
Anyone looking for clues as to the likely broad direction of Sunak’s third budget need look no further than his speech at the recent Conservative Party Conference. “I have to be blunt with you, our recovery comes at a cost. Our national debt is almost 100 per cent of GDP – so we need to fix our public finances.” Sobering words and ones that suggest that when it comes to next week’s Budget tax rises are likely. So, what sort of Budget can we expect?
Putting Sunak’s comments in his conference speech to one side, further clues might come from measures already announced that are due to take effect in April 2022, the start of the 2022-23 financial year. These include the freezing of income tax allowances, and the lifetime allowance for private pension contributions. Through what is known as ‘fiscal drag’ (allowances remaining at the same level while wages/income go up) if inflation continues at anything like its current elevated level (3.2% in the 12 months to August 2021, although the Bank of England thinks it could go above 4% by December and remain around that level until the spring), over time this will raise large amounts for the Exchequer.
In September, Sunak announced a 1.25 percentage point rise in National Insurance to fund social care and the NHS. The government also announced a 1.25 percentage point rise in Dividend Tax. Another measure already in the pipeline is the suspension of the so-called pension ‘triple lock’. This is the government’s guarantee that the state pension will rise every year by inflation, average wage earnings growth or 2.5%, whichever is the highest. Given that average pay growth stands at 7.2%, it’s hardly surprising that Sunak felt continuing the triple lock was unaffordable. It seems probable that state pensions will go up in line with inflation (Consumer Price Index).
Other revenue sources
So where else might Sunak look to swell the government’s coffers? One possibility is Capital Gains Tax, which brought in £8.3bn in the 2017-18 tax year. Following a report by the Office of Tax Simplification (OTS) in November 2020, commentators have suggested that Sunak may implement some of its proposals. One OTS recommendation was that the government should “consider more closely aligning Capital Gains Tax Rates with Income Tax rates”. If introduced, this could see lower rate taxpayers, who currently pay the 10% rate, paying significantly more. The OFT also proposed a reduction in the CGT Allowance from £12,300 to between £2,000 and £4,000.
Another OTS recommendation was that where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death. Under the current rules, individuals acquiring assets from a deceased person’s estate are treated as acquiring them at market (probate) value rather than at the price the original owner paid for them. The OTS argued in favour of using the initial price the original owner paid for an asset, to be followed by a rebasing to the price in the year 2000.This would not affect those who retained assets, only those who sell acquired assets.
Inheritance Tax, which the Office for Budget Responsibility(OBR) estimates will bring in £5.6bn in 2021-22, is another possible target for the Chancellor. In recent years, this tax has been the subject of reports by both the OTS, and the All-party Parliamentary Group (APPG) on Inheritance & Intergenerational Fairness. The APPG recognised “an increasingly widespread view that current reliefs and exemptions are in some cases outdated and in other cases abused as families seek to avoid tax”. Among its recommendations are that reliefs for lifetime gifts made more than seven years before death and gifts out of income are abolished.
The OTS proposed that the current seven years is cut to five and that taper relief, whereby gifts given 3 to 7 years before death are taxed on a sliding scale is abolished. Introducing this would mean that for any (non-exempt) gift made in the last five years of life, the estate would be charged 40% on death.
Reform of tax relief on private pensions is a recurring subject of Budget predictions. This Budget is no different. With Her Majesty’s Revenue and Customs (HMRC) projecting pension tax relief to cost £41.3bn in 2019-20, up from £38.2bn in 2018-19, it certainly makes an appealing target. We recently looked at the impact of introducing one possible option – a flat rate of tax relief. However, it would be a brave Chancellor who finally decided to grasp this political hot potato.
The salary threshold at which graduates repay their student loans is another area the Chancellor is reported to be eyeing up. Reducing the threshold from £27,295 to £23,000 would reportedly save the Treasury £2bn.
A crumb of comfort
With the Chancellor keen to restore credibility to the public finances, some further tax rises are probably inevitable. One crumb of comfort for hard-pressed taxpayers, who even before the Budget are reeling from the rising cost of living and tax rises already announced, are indications that the public finances are in a healthier state than previously predicted. The Institute for Fiscal Studies (IFS) recently suggested that government borrowing this year would be over £50bn less than predicted at the time of the previous Budget in March. This could allow Sunak some ‘wiggle room’ to temper next week’s measures. Alternatively, he may decide to take a tough approach now, leaving open the possibility of cutting taxes later in the political cycle.
After the Chancellor has delivered his Budget, Courtiers will be providing a summary of thoughts from various teams, alongside a comprehensive but digestible information pack containing all the key points, which will be available on the Courtiers website and emailed to all clients.
As always, the devil will be in the detail, and clients may wish to take the opportunity to talk to their Courtiers Adviser about what the Budget means for them and their families specifically.