To tax or not to tax
- Author : Gemma Maher
- Date : 22 Sep 2020
The last six months have seen an unprecedented but much-needed increase to the levels of government spending in the UK, to rise to the challenges of Covid-19. The image of Rishi Sunak taking to the stand to announce monumental measures to try to support the economy, businesses and workers is almost as memorable as Boris addressing the nation to tell us we were locking down.
For many, Rishi came across well: a strong figure, commanding respect, dedicated to the task at hand. That being said, the measures put in place to support businesses and employees have come at a great cost to the Treasury. It was estimated that the furlough scheme would cost £14bn a month, and thus far is said to have cost roughly £40bn. Public sector debt has now hit more than £2 trillion for the first time in history. This leaves the government in the difficult position of trying to continue to support businesses, workers, and the economy whilst also recouping money that has been spent.
There’s been a lot of speculation about how Rishi might try to use tax rises to collect some of this money. Where formerly the conservative government may have preferred to cut spending rather than increase taxes, the unprecedented amount of spending this year makes it a very real possibility that tax rises will come into play. Speculation has focussed largely on the likelihood of increases to i) Capital Gains Tax (CGT) on assets and/or property, ii) Corporation Tax or iii) National Insurance contributions for the self-employed. So, what do these potential changes mean?
It’s rumoured that one of Rishi’s proposals is to increase Corporation tax from 19% to 24%, and this seems one of the more likely outcomes. Corporation tax in the UK has been reduced consistently since the 90s, when it was at 33%. Even during the last decade it has reduced from 28% to its current level of 19%. In that sense, there is some wiggle room. But while the older, more established businesses in the UK would have a recollection of times of higher corporation tax rates, newer and smaller businesses will not be used to budgeting for these amounts. A rise would also be particularly unwelcome for those industries that we see really are struggling such as aviation and hospitality. There will of course be pressure to give businesses as much support as possible during these difficult times.
Another concern will be that this is a time when the UK ought to remain competitive in Europe and globally, particularly with Brexit around the corner. Several countries that have much lower corporation tax rates have already been able to attract businesses concerned about Brexit. While the UK remains largely on a par with Europe, and more cost effective than countries like France and Spain where the rates are 32% and 25% respectively, it must be remembered that some countries still remain more appealing to businesses, such as Ireland where the rate is 12.5% as a comparison.
Capital Gains Tax (CGT)
Another potential move for Rishi is an increase to Capital Gains Tax (CGT). CGT is applicable upon sale of assets including shares, investments, or real estate. The rate at which CGT is paid differs depending on your income tax band and the type of asset. For shares and investments, you’ll pay 10% on any gains above the allowance if you’re a basic rate taxpayer, and 20% as a higher rate taxpayer. Similarly, for real estate you’ll pay 18% and 28% respectively.
There’s been speculation about a rise in CGT rates, as Rishi commissioned a review not long after the start of the pandemic, triggering opinion that he might be looking to increase rates to increase income. CGT like Corporation Tax has been reduced over the years and so again there is wiggle room to increase it back to former rates. In the 80s CGT was paid at a rate of 30%, and during the 90s and early 00s it was paid at an equivalent rate to income tax bands.
There is a popular theory that if Rishi were to make changes to CGT rates, this would come in the form of a return to a previously used model where it is equivalent to income tax rates. Such a system has not been in place for several years so might be a shock to investors, particularly those who are higher rate taxpayers. However, it is a possibility and would certainly generate a good amount of income to help claw back Covid-19 spending.
Key Facts from 2018-19 tax year:
- The total CGT liability was £9.5bn from 276,000 taxpayers. This was realised on £62.8bn of chargeable gains.
- Most of the above figure comes from a small number of taxpayers who have made gains of over £5 million. This represents roughly 1% of CGT taxpayers every year.
- In 2018-19 the number of taxpayers decreased, with 13% of taxpayers producing 42% of the liability.
National Insurance has been around since the National Insurance Act in 1911. Although it has adopted many different guises since its introduction, the purpose remains the same as it ever was – to provide everyone with access to essential state benefits such as the State Pension, Maternity Allowance, Job Seeker’s Allowance etc.
National Insurance is importantly paid by both employers and employees, and therefore effects both parties in the chain. It is taken out of PAYE each month and many have started to regard it as an addition to income tax. There are four classes depending on your type of work and voluntary contributions. Most employed people will pay Class 1, which is currently 12% of your weekly earnings between £183 and £962 (2020-21), and 2% of your weekly earnings above £962.
In the discussion of potential tax rises the rumour is that Rishi is considering an increase to Class 4 contributions for the self-employed. Currently Class 4 are paid at a rate of 9% between the lower profits limit of £9,500 per annum and the upper profits limit of £50,000. There is talk of increasing this to 12%, which would bring it in line with Class 1 contributions for the employed. National Insurance contributions have been looked at in previous budgets with Philip Hammond having announced an increase in his 2017 budget, but later doing a U-turn.
An increase in NI contributions for the self-employed is a possibility. This has been looked at before and would be an easy way of bringing in more revenue, and could also be dressed up as fair, being brought in line with contributions for the employed.
Needless to say, Rishi has several difficult decisions ahead of the November budget. Before all this we might have expected a Conservative government to cut spending to save money, but the current circumstances are so unprecedented that suddenly tax increases are on the table. If this doesn’t take the form of a a rise in existing taxes, it could be that they decide to it would be more efficient and effective to introduce a new way of collecting the money.
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