What Tax Rises Are Most Likely To Be Announced In Rishi Sunak’s Budget?
The Chancellor faces a perilous financial situation ahead of the Budget [PA Images]
Rishi Sunak’s 3 March Budget is likely to include a range of Covid support measures, but tax rises could be needed to pay for it. PoliticsHome sets out what looks most likely to be included.
The Chancellor has set the scene for a wave of tax rises in this week's Budget after he said he would use the fiscal set piece to "level with people" about the "enormous toll" the pandemic had taken on the nation's finances.
The government has increased spending and borrowing to record levels to protect businesses and public services over the last year, leaving the Treasury grappling with the national debt of over £2 trillion for the first time in history.
Sunak has refused to comment on multiple reports that he was planning to raise taxes in Wednesday's Budget, before slashing them in a subsequent Budget ahead of the next election.With additional spending expected, the Chancellor will be looking to try and cover some of those costs putting further pressure on the government to increase tax rates.
What new tax gathering measures could the Chancellor take, and what could they raise?
One of the most likely measures the Chancellor could announce is by hiking corporation tax rates over the course of this parliament.
Sunak could use US President Joe Biden's proposed business tax rises from 21% to 28% to make the case for higher rates in the UK, which currently stand at 19 per cent, the FT reports.
The UK’s rate is one of the lowest in the G7.
According to The Times, Treasury officials have floated a 6% rise over the coming years, but the reports have already raised concerns among business groups and Tory MPs.
Instead, a more measured rise to 23% is considered more likely, and with an estimated £3.3bn raised for each percentage point increase in the rate, it would be a significant increase in the tax take.Hitting businesses with increased taxes after such a turbulent year would undoubtedly trigger a backlash among business groups, but given the level of support they have received in the form of furlough schemes, loans and grants, the Chancellor could make the case that it was a fair method of recouping some of the costs.
Corporation tax also only applies on the profit made by companies, so those still facing financial troubles as they emerge from the pandemic would have some level of protection from the increase in the levy.
Personal Allowance And Pension Freeze
There is growing speculation that one policy favoured by Sunak is a freeze on the threshold for the "lifetime allowance" (LTA) on pensions.
Dubbed as a "stealth tax" it would mean limiting the amount people can put tax free into the pensions pots at the current level of £1,073,100 for the length of this parliament.
The LTA had been expected to rise by £5,800 in 2021/2022 with further rises due in the following financial years in line with inflation. The freeze would mean those adding to their pension pot above the limit would have to pay 25% on any additional income for the pension pots, raising an estimated £250m annually for the Treasury by 2024.
The freeze would hit higher earners, or those who began investing in their pension plans early, while leaving lower earners to continue adding to their pension pots up to the LTA limit without any tax implications.
It would be a big step for a Conservative chancellor to make, and would be unpopular among many older voters in the Tory heartlands, but after years of calls for the pension pot issue to be tackled, the pandemic could give Sunak adequate cover to make the change.The freeze could also be applied to the personal income tax allowance which is the amount people can earn without paying any additional tax, currently set at £12,500.
Like the pension allowance, the rate at which it increases is linked to the Consumer Prices Index (CPI) inflation rate – currently at 0.5% – which translates to a modest increase this year to £12,570.
The current £50,000 basic rate threshold, above which people pay 40% income tax, could also be frozen, essentially scrapping a planned uplift which was expected to rise to £53,000 by 2024/25.
Assuming the freeze is kept in place until the end of this parliament, this would mean those earning between £15,000 and £50,000 would pay an additional £140 in tax over the period even if the CPI inflation rate remains steady at 0.5%.
According to The Sun, those earning between £60,000 and £100,000 would pay an additional £680 in tax by 2024/25.
But the policy could be a significant earner for the Treasury, with new analysis from The Resolution Foundation think tank concluding the combined effect of freezing the thresholds of both the basic rate and the personal income tax allowance until 2024/25 could raise an estimated £6bn in tax revenue.
Crucially, freezing the rates rather than lowering them would mean Sunak could raise the extra funds without technically breaching the Conservative's manifesto commitments not to raise the rate of income tax.
Capital Gains Tax
Considered a "low hanging fruit" among some market experts, one measure reportedly being considered by Sunak is an overhaul of the Capital Gains Tax (CGT) system.
CGT is charged when someone sells assets, such as a second property, for more than they paid for it, with a percentage of the profit being paid in tax.
In a clear sign that the Chancellor is eyeing up the system for reform, he commissioned the Office of Tax Simplification last July to undertake a review of CGT.The Treasury-based body concluded the current system was "counter intuitive" and created "odd incentives" because CGT was taxed at a lower rate than income tax.
The review concluded that doubling the rates to put them in line with Income Tax rates, and slashing the tax-free allowance of £12,300 to as little as £2,000 could raise an extra £14bn.
Overhauling the CGT would also likely be a popular move among voters, following a recent Savanta ComRes poll which found 61% of people back an increase – with critics of the policy saying it disproportionately benefits wealthy people who end up paying less tax on their unearned income than people pay on their wages via Income Tax.
But some industry analysts have warned the change could impact property and business owners, leading to a reduction in investment in the UK
Given the current economic challenges, the Chancellor is unlikely to announce any immediate major changes to CGT on Wednesday, but could instead opt to bring in a gradual increase in the rates over several years to come.
Covid could still limit tax rises
Ultimately, the extent of the tax-raising measures could be limited by the fact that the country is still in a national lockdown, with the roadmap out keeping most businesses essentially shuttered for months to come.
With clear signs that Sunak will extend many of the business support measures, including the furlough scheme and some rate freezes, it would be counterintuitive for the Chancellor to launch an aggressive series of tax rises.
Instead, Sunak could opt to announce a series of consultations on the tax raising measures, with the bulk of the big tax raising measures held back until Autumn when the government hopes much of the country will be back open for business.
But with an eye-watering national debt and the ongoing cost of the government's financial support measures, the Chancellor is facing a tightrope act between protecting the economy from further harm and capping the levels of astronomical public spending.