• The OBR’s Economic and Fiscal Outlook published today states that restoring the public finances to balance would require tax rises or spending cuts of between £27 billion and £102 billion by 2025-26
• Tax rises in next year’s Budget seem inevitable
• Research* carried out by AJ Bell in June revealed over three-quarters (77%) of UK workers are willing to pay extra income tax to fund the COVID-19 response
• In terms of specific tax raising options:
o Measures targeting capital gains and dividends appear more palatable to voters, with over a third (37%) listing these as ‘most acceptable’
o Scrapping the state pension triple-lock or restricting pension tax relief the least favoured options
Tom Selby, senior analyst at AJ Bell comments:
“In many ways Rishi Sunak’s first spending review in charge of the Treasury confirmed what we already knew – the country faces a colossal financial black hole as a result of COVID-19 and the Chancellor has few easy choices ahead of him.
“Just as a huge national effort has been required to slow the spread of the virus, it is inevitable the Treasury will turn once again to citizens to help repair the financial damage wrought by the pandemic. That means either tax rises or spending cuts or more likely, a combination of the two.
“The Conservative election manifesto puts the three biggest levers available to the Chancellor out of his reach. Between them income tax, National Insurance and VAT make up around three quarters of the tax collected by the Exchequer. Given the colossal size of public borrowing, that means the Chancellor is going to have to clamp down harder on other areas to bring borrowing under control. As well as explicit tax rises, he will be looking at tax reliefs, particularly those which provide protection for wealthier members of society.”
Pension tax relief reform
“If rumours are to be believed higher-rate pension tax relief was perennially in the sights of the Treasury even before the pandemic hit. This is perhaps unsurprising given official estimates point to a net cost of incentivising retirement provision via pension tax relief and National Insurance relief on employer contributions at around £40 billion a year.
“Scrapping higher-rate relief altogether has the potential to save the Treasury billions of pounds in the short-term.
“However, it would also be complicated, risk damaging the fragile retirement savings culture being fostered in the UK through automatic enrolment, and could even spark a war with public sector trade unions, whose members benefit from generous defined benefit (DB) pensions and would be among those most affected by such a reform.
“In short, even in the wake of a global pandemic, taking the axe to the pension perks of middle Britain would be a huge political risk.
“Alternatively, the Chancellor could look to tinker at the edges again, perhaps through a reduction in the £40,000 annual allowance. This would raise less money than ditching higher-rate relief altogether but would also be much less divisive.”
Cap pension tax-free cash
“Another often floated money-saving option open to the Chancellor would be to cap the amount of tax-free cash someone can take from their retirement pot from age 55 (today this is limited only by the £1,073,100 lifetime allowance). However, this is likely to be unappealing for two reasons.
“Firstly, the 25% tax-free cash entitlement is one of the few benefits of retirement saving that is truly understood and appreciated by the general public, meaning attacking it would likely prove extremely unpopular.
“Secondly, if the Treasury were to cap tax-free cash it would presumably need to make allowances for the retirement pots people had already built up.
“As such, capping tax-free cash would risk being both unpopular and ineffective in boosting the Treasury’s coffers over the short-term.”
Scrap state pension triple-lock
“The state pension triple-lock appears to have been spared for next year at least, with the 2.5% underpin set to boost the value of the flat-rate state pension to £179.60 a week.
“Although the triple-lock was a manifesto commitment, the economic backdrop facing the Chancellor means unpalatable spending decisions will likely be necessary.
“By 2024/25 the triple-lock is expected to cost £6 billion more than a straight CPI inflation lock and £3.2 billion more than a lock to average earnings.
“Ditching the triple-lock promise, while unpopular, could therefore go some way to addressing the Chancellor’s massive fiscal deficit.”
Levy National Insurance on pensioner incomes
“While employees are currently subject to both income tax and National Insurance (NI) on their earnings, retirement incomes benefit for an NI exemption.
“Making private pension incomes subject to NI could be attractive to a cash-strapped Chancellor as it would likely raise significant revenue and could be sold to the public as simply levelling the playing field between generations.
“However, it would also be unpopular among older voters who, historically at least, have been the key demographic for anyone with aspirations of winning a general election.”
Aligning self-employed and employed National Insurance
“The Chancellor also hinted earlier in the year that the trade-off for pandemic support for the self-employed might be their National Insurance payments are brought further into line with the employed. The Conservative manifesto pledges not to raise the rate of National Insurance; a bit of political fudge could allow the structure to be amended without breaking that promise. According to HMRC, aligning self-employed and employed rates of National Insurance could raise around £6 billion a year.”
Align Capital Gains Tax with income tax rates
“The Chancellor has already signalled his appetite for reform of Capital Gains Tax (CGT) after instructing the Office for Tax Simplification (OTS) to carry out a review of the current regime.
“That review was published earlier this month and gave conditional backing to proposals to align CGT and income tax rates.
“This would have significant implications for anyone selling a property that isn’t their main residence or investment outside a tax wrapper.
“At the moment CGT is levied at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers. For property sales, CGT is 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.
“If this were to be aligned with the income tax regime, high earners could face a huge hike in their CGT liability when selling down assets not held within a SIPP or ISA.
“As such, the extent to which CGT reform would raise cash for the Exchequer would depend in part on how people respond – and specifically whether investors choose to hold onto assets rather than dispose them and pay the higher tax charge.”
*Research conducted by AJ Bell and Opinium between 22/05/20 – 26/05/20 with 2,001 respondents
Survey results:
Q1: Government borrowing is increasing substantially to get the country through the COVID-19 crisis. Thinking about potential tax increases to help repay this debt, to what extent do you agree or disagree with the following statements?
|
We all have a responsibility to contribute |
Tax increases are a necessary evil to come from the situation |
There is no other way to pay the debt other than tax increases |
The government were right to borrow so much in order to get us through the crisis |
|
|
Strongly agree |
23 % |
20 % |
15 % |
29 % |
|
Agree |
43 % |
44 % |
33 % |
40 % |
|
Neither agree nor disagree |
24 % |
24 % |
31 % |
23 % |
|
Disagree |
6 % |
8 % |
14 % |
6 % |
|
Strongly disagree |
3 % |
5 % |
7 % |
2 % |
Q2. Which changes in taxation would you find most acceptable in order to repay the country’s COVID-19 debts?
|
Increase in dividend tax (dividend is a sum of money that a company may pay out to someone who owns shares in the company, i.e. a shareholder) |
37 % |
|
Increase in capital gains tax (a tax you pay on a portion of the profit – or capital gain - you earn from the sale of various chargeable assets, including property or land that’s not your main residence.) |
37 % |
|
Increase in income tax |
33 % |
|
Increase in Inheritance Tax |
22 % |
|
Increase in national insurance |
21 % |
|
Increase in VAT |
16 % |
|
Increase in stamp duty |
14 % |
|
Removal of the state pension triple lock |
10 % |
|
Restriction of pension tax relief |
9 % |
|
None – I don’t feel any change to taxation would be acceptable |
21 % |
Q3. If you have to pay more tax to help repay the country’s COVID-19 debts, would you prefer to be taxed in small amounts over a longer period of time or higher amounts over a shorter time frame?
|
Lower amounts over a longer timeframe |
85 % |
|
Higher amounts over a shorter timeframe |
15 % |
Q4. How much extra income tax would you be willing to pay to help fund the COVID effort? This would be on top of what you already pay.
|
0% - I would not be willing to pay any additional income tax |
23 % |
|
1% |
21 % |
|
2% |
19 % |
|
3% |
11 % |
|
4% |
8 % |
|
5% |
12 % |
|
10% |
4 % |
|
20% |
1 % |
|
More than 20% |
2 % |
|
Average (%) |
3.9 |
