More information on future economic measures in the UK, including tax cuts and spending pledges, are expected in the Autumn in the hope that a favourable economic contingency would encourage taxpayers to accept more willingly future tax rises. Meanwhile, it is expected that short-term measures to increase consumption will be published shortly.
Current situation
Some numbers:
- In April 2020 the UK GDP (Gross Domestic Product) has seen a fall by 20.4%, the worst result which has ever been measured.
- The UK public sector net debt (PSND) in 2020/2021 is expected to be 95.8% of GDP. Based upon the Sustainable Investment Rule, this number should always remain below 40% of GDP.
- The public sector net borrowing (PSNB) in 2020/2021 will be almost £300bn.
- The UK Government has spent more than £100bn in measures to support the economy. Meanwhile, revenue has decreased drastically.
- As of 31.05.20, 8.7 million of jobs have been furloughed at a cost of £17.5bn.
- HMRC’s total receipts in April 2020 were £25.9bn lower in comparison to the same month of 2019. Of this, VAT receipts were £13.9bn lower, Income Tax, CGT and NICs were £6.3bn lower and Corporation Tax receipts were £4.1bn lower.
Short-term measures to increase consumption
At the current stage, it is hard to say whether the recovery of the UK economy will be immediate (therefore “V-shaped”) or it will take more time (“U-shaped”). Most likely the UK Government will introduce short-term measures to increase spending amongst the consumers in the near future.
These measures could be general or otherwise they could focus on supporting the sectors most hardly hit by the pandemic. Considering that over 50% of the Government’s tax revenue comes from income tax and NICs, it will be definitely a crucial point to save and create jobs.
Some of the measures could be:
- Exemptions from employer NICs for new employees;
- Exemptions/reductions in stamp duty land tax (SDLT);
- Infrastructure projects;
- Government-funded training schemes;
- Reductions in VAT – across the board or for particular sectors;
- Tax incentives for investing in start-ups (particularly tech start-ups).
It is important to notice that all these measures, if introduced, are likely to be temporary.
Future tax rises
It is plausible that there will be an increase in taxes in the UK in the next two years. Let’s briefly discuss which taxes may increase and their consequences:
- Income Tax Rates: it is very likely that Income Tax Rates will be increased. This is an extremely easy way of collecting more taxes from the taxpayers since it represents more than a quarter of the total tax receipts. However, in order for it to be effective, it will be necessary to increase rates in all tax bands. The calculations are simply explained: an increase of the basic rate from 20% to 21% would mean an increase in Income Tax Revenue of £4.7bn per year, while an increase of the higher rate from 40% to 41% would increase the revenue of only £1bn per year. Finally, if the additional rate were increased from 45% to 46%, that would only guarantee the Government an increase of £105m.
- NICs: several changes could be made to NICs in order to increase the Government’s revenue. There could be an increase of the rate for higher earners with the introduction of a flat rate of NICs or scrapping the upper-earnings limit. Another option could concern self-employed people earning more than £9,501 per year and it would see an increase of their current NICs set at 9% (while it is set at 12% for employees).
- Tax on dividends: it is possible that the rates for this tax will be increased in order to match the same for income tax. Therefore, the rate would increase from 32.5% to 40% for the higher rate taxpayers, while it would increase from 38.1% to 45% for additional rate taxpayers.
- Dividends paid to non-UK tax residents: currently non-UK tax resident individuals do no pay UK income tax on UK dividends. This could change in the future and a withholding tax (subject to the UK’s existing double tax treaties’ terms) could be introduced. It must be said that doing so many would be relieved from this tax anyway.
- Capital Gain Tax Rates: it is very likely that these rates will be increased in the near future. Currently CGT tax is paid at 20% by higher rate taxpayers on all gains, apart from residential property gains and carried interests, which are taxed at 28%. It is expected that all gains will be charged at 28% sometime in the near future.
- Corporation Tax Rates: it is quite unlikely that the Government will increase the Corporation Tax Rates since the main goal is to support business growth and investment.
- Windfall Tax: there is a good chance that a windfall tax will be applied to some businesses or economic sectors which have not suffered excessively from the pandemic. Doing so, the cost of the crisis would be borne by the current taxpayers, who have benefited from the support measures, rather than future taxpayers.
- Wealth Tax: the probability that a Wealth Tax is introduced in the near future is extremely unlikely. It would only raise an amount of 1% or 2% of the total revenues and it would be very complicated to manage.
- Tax Reliefs: an increase in the rate of CGT and a restriction or removal of certain CGT or Inheritance Tax (IHT) reliefs is quite probable since it would be very easy to manage and it would guarantee a similar revenue increase than a Wealth Tax. The reliefs with a higher chance to be restricted or abolished are: CGT main residence relief and tax-free uplift on death and IHT reliefs for business and agricultural property. A save of £6bn in the next 5 years could be expected by the Government if the IHT relief for business properties is abolished. Finally, also restrictions on funding pensions or tax-free withdrawals from pensions are a possible option.
Contact us at info@well-tax.com if you need to discuss matters regarding your company or your position as a self-employed.
Photo credit: Julia Solonina
