June 23rd, 2020
5 ways the government could fund the coronavirus crisis, and what they mean for your clients
In recent months, UK debt has risen to unprecedented levels. The total amount of debt has risen by £173 billion over the last year, reaching more than 100% of the nation’s GDP for the first time since 1963.
Support measures to negotiate the coronavirus crisis are likely to cost more than £300 billion while, to compound the problem, tax receipts were down £2.2 billion in March, compared to the same time last year.
All this means that many experts are predicting that taxes could rise dramatically once the pandemic is over. And, so as not to burden the lower paid who have been on the ‘front line’ during the crisis, it’s likely to be the better-off that are hit hardest.
Here are five ways the government could raise additional revenue, and what it means for your clients.
1. No more pension ‘triple lock’
Thanks to the ‘triple lock’, the amount of State Pension that retirees receive rises each year by the highest of:
- Wage growth
With wages and inflation both falling, pensioners would expect a 2.5% rise next year.
However, with nine million furloughed workers currently earning 80% of their wage, average wages are set to increase significantly next year. This means State Pension recipients could get a very large increase in 2021.
While the government have committed to retaining the triple lock, reports suggest that it could be suspended for a year or two. This would mean that anyone in receipt of the State Pension, or anyone about to start receiving payments, could see the amount rise by less than expected.
2. Inheritance Tax reforms
After World War II, one of the ways the government increased tax revenue was by a rise to the rate of Inheritance Tax (or ‘estate duty’ as it was then).
The Inheritance Tax (IHT) rate currently stands at 40% and so the Chancellor could increase this to raise additional revenue. Other measures the government could consider include:
- Reducing the current threshold from £325,000
- Reforming the current reliefs – for example, to abolish gifts, the ‘seven-year rule’ or the ability to pass on unused pension assets tax-free.
Clients may want to take advantage of the various allowances and exemptions – particularly relating to gifts – while they are available.
3. A rise in the amount of tax paid by the self-employed
Rishi Sunak has already hinted that taxes for self-employed workers will rise in the future.
When announcing the Self-Employed Income Support Scheme in March, Sunak said: “It is much harder to justify the inconsistent contributions of people with different employment statuses. If we all want to benefit equally from state support, we must all pay in equally.”
The most likely hike is a rise in National Insurance contributions for self-employed workers.
4. Capital Gains Tax rises
Having made a change to Capital Gains Tax (CGT) in his first Budget, the Chancellor could well introduce further reforms later this year.
The lifetime allowance of Entrepreneurs’ Relief has already been reduced from £10 million to £1 million and, with CGT having one of the lowest tax rates at 10% for basic rate and 20% for higher rate taxpayers (18% and 28% for residential property), this is an obvious target for reforms.
The most likely reform to CGT is that the rates of tax are brought in line with Income Tax rates. In addition, the allowance (currently £12,300) could be reduced or abolished altogether.
Clients should consider using the current allowance sooner rather than later in case of reforms. Making the most of ISA allowances (where proceeds are free of Income and Capital Gains Tax) could also be even more important.
5. Pensions tax relief reform
Pension tax relief costs the Treasury £35.4 billion a year and most of this goes to higher rate taxpayers.
An option under serious consideration is to move to a flat rate of tax relief for all taxpayers, rather than the taxpayer’s marginal income tax rate. This could significantly affect clients who pay higher or additional rate tax.
If clients save into a pension and are eligible for higher or additional rate tax relief it may be wise to use up this relief soon in case changes are made in an emergency Budget.
Get in touch
Changes to tax rates, allowances or exemptions could have a significant impact on your clients’ plans.
If you have clients that would benefit from advice, or you’re interested in how you can work more closely with us, please get in touch. Email email@example.com or call 01562 829 222.