What does the March Budget hold in store?

Laith Khalaf
24 February 2021

•    CGT and corporation tax look like low hanging fruit
•    Pensions tax relief is an especially stingy nettle to grasp
•    Green taxes and spending
•    Stealth and wealth taxes
•    Excess profit tax
•    Recovery bonds and the NS&I target

Laith Khalaf, financial analyst at AJ Bell, looks at some of the key points for savers and investors to keep an eye on in the forthcoming Budget, and beyond.

“The tussle between economic stagnation and combustion leaves the Chancellor performing a high wire tight rope act in next week’s Budget. On one side lies spiralling government debt and potentially rampant inflation, on the other side, a faltering economy, and more job losses. The Budget is likely to remain focused more on providing support for the economy for the time being, while also signalling greater fiscal prudence coming down the tracks. The really difficult decisions about taxation will probably happen later this year, when hopefully we’re all in a better frame of mind to stomach some bad news. That also buys the Chancellor some time to see how successful the vaccine programme is, and how strongly the economy recovers.”

Government support

“The cautious approach to lifting lockdown means that support measures such as the furlough scheme and business rates relief are likely to be extended until later in the year, potentially with some kind of taper to wean the economy off government hand-outs gradually. The Treasury can borrow at such low rates right now that it makes sense to open up the purse strings, and go for broke on generating economic growth. But at some point the taxpayer will need to pick up the bill. The IFS reckons that £60 billion of tax rises would be a plausible figure to expect in the medium term, in order for the government to balance the books. 

“The Chancellor also needs to be wary of stoking inflation. The voluntary repression of economic activity is such a strange situation to find ourselves in, that no-one can really predict how strong the recovery will be, and whether it will create nasty inflationary pressures, when added to all the cash sloshing around in the system. Given the scale of the uncertainty, it makes sense for the Chancellor to take a staggered approach to fiscal policy, allowing him to regularly measure the temperature of the UK economy, and adjusting strategy accordingly. Hence it looks likely there will be a second fiscal event later in the year, when the post-vaccine course of the pandemic becomes clearer.”

Stamp duty holiday

“The stamp duty holiday is due to end on 31st March, and reports suggest the Chancellor will extend this until the end of June. This seems pretty hard to justify. The stamp duty holiday is not particularly well targeted in terms of helping people onto the housing ladder who might be struggling to afford the move. In fact, by stimulating demand and pumping up prices, it’s arguably making the prospect of property ownership more remote for many people. Rather than extending what was devised as an emergency measure, it would be more sensible to conduct a root and branch review of stamp duty, with a focus on creating a housing market that is both healthy and equitable. 

“Extending the stamp duty holiday into summer simply kicks the can down the road, and removes the stimulus right at the point where unemployment is expected to be nearing its peak, and housing transactions tend to be seasonally high. Inevitably when we get there the Chancellor will face the same pressures. If he’s going to make the stamp duty exemption a permanent change, he will need to set out why that is a prudent reallocation of taxpayer funds, at a time when they are under extreme stress. If he’s going to withdraw the stimulus in one go, there’s still going to be a cliff edge. Some sort of tapering of the measure could provide a softer landing, and a period of adjustment for home buyers, and would seem more sensible than simply leaving a difficult decision for another day.”

Capital Gains Tax

“The Chancellor asked the Office for Tax Simplification to review CGT last year. The OTS duly obliged and recommended that CGT rates be raised in line with income tax rates, and that the annual £12,300 annual allowance of tax-free gains be cut to somewhere in the region of £2,000 to £4,000. For a Treasury that is looking to pinch some pennies, CGT looks like low hanging fruit. If the Chancellor is minded to raise CGT, it’s just possible we may get some movement in the March budget. The government would want to give notice that any change to CGT is coming, to avoid a fire sale of assets, and Rishi Sunak could use the Budget to signal rate rises in future. That could stamp some thrifty credentials on a Budget that risks being perceived as profligate.”

Higher rate tax relief on pensions

“No Budget is complete nowadays without some speculation that higher rate tax relief on pensions might be axed. Such a move would be progressive, and would raise money for the Exchequer. But it would be fiendishly difficult to implement, requiring replumbing for huge parts of the pension system. Raiding pensions is politically toxic at any time, but one group of people who would be particularly badly hit by cutting higher rate relief would be doctors, the very people who have been on the front line in the battle with COVID. Trying to cut pension tax relief right now could make Theresa May’s ‘dementia tax’ looks like a long-lived and successful government policy.

“ISAs are generally considered safe from government interference because the tax relief is on investment returns, rather than contributions, so shifting allowances doesn’t really yield a great deal for Treasury finances, particularly in the short term.”

Green taxes and spending

“Environmental measures are likely to feature heavily in government fiscal policy, particularly this year seeing as the government is hosting the UN Climate Change Conference in November. Unfreezing fuel duty looks like a nice green policy which also raises money for the Exchequer. There have been reports the government is looking into some sort of ‘pay per mile’ tax for drivers, to protect Treasury revenues as the shift to electric cars takes place. However, with the government also wanting to get the economy moving, right now doesn’t present the most timely entry point for such a tax. It also seems unlikely the Chancellor will want to add to the anguish of airlines and holidaymakers by increasing air passenger duty.”

Stealth taxes

“The Conservative election manifesto pledged no rises to income tax or National Insurance, but the Chancellor could choose to freeze allowances instead, when normally they would be expected to rise by at least inflation. Workers will then pay more tax as their earnings rise, but the tax-free allowances stay static. It’s fiscal drag on steroids. The Resolution Foundation reckons that keeping the tax-free allowance at £12,500 would raise £5 billion a year by 2024/25, while keeping the higher rate threshold at £50,000 would raise £1 billion a year. Those are pretty tempting sums for the Chancellor to grab, without even technically raising taxes.”

Wealth taxes

“The Conservative chair of the Commons Select Committee has suggested a one-off wealth tax to help pay for the cost of the pandemic. The COVID crisis has exacerbated the gulf between rich and poor, and while some people have struggled to make ends meet, others have actually prospered financially as a result of lockdown. A wealth tax would attempt to redress that balance. The Chancellor has reportedly dismissed the idea, and it doesn’t seem to chime with traditional conservative values. However these are unprecedented times, and there are some surveys which suggest many taxpayers are actually willing to put their hand in their pocket to help out.

“The mechanics of implementing a wealth tax are fraught with divisive decisions however. People who have large amounts of wealth tied up in a final salary pension or their main residence may not have the cash available to pay a wealth tax, and liquidating their assets is not feasible. But if you exclude these assets, then it doesn’t seem fair that people who have built up wealth in liquid assets like defined contribution pensions, shares and cash should shoulder the entire burden. All in all, a wealth tax is a hot potato best left on the shelf.”

Corporation tax

“Corporation tax looks a likely candidate for a tax hike, perhaps not immediately, but when the government deems recovery is secured. The UK currently has the lowest corporation tax rate in the G7, having been slashed from 28% to 19% under plans conceived by the former Chancellor George Osborne. Seeing as the government has provided support to the corporate sector though the furlough scheme, business rates relief, and various loan schemes, there is a case for companies shouldering some of the burden of repaying the government debt pile. What’s more, a corporation tax hike isn’t going to raise the hackles of large swathes of the voting public.

“However higher taxes on company profits do still act as a drag on economic activity. Corporation tax reduces the money available to companies to invest in projects and personnel. It also reduces the earnings available for distribution to shareholders, who might otherwise choose to invest that money elsewhere in the economy. The Chancellor will be well aware of these trade-offs, but with little room for fiscal manoeuvre, corporation tax will look a tempting target.”

Excess profits tax

“There have been some suggestions that an excess profits tax would be a good way to redistribute some of the company profits made from the pandemic towards areas of the economy that have been badly hit. It might sound good at first glance, but it falls down on closer inspection. Defining precisely what constitutes an excess profit is arbitrary, and many of the companies which have done well during the pandemic have actually invested in providing us with essential services throughout lockdown – penalising them for doing so doesn’t exactly send the right message. And what about the fact that supermarkets have done the decent thing and paid back their business rates relief? Do they get some credit in the bank? Despite rising revenues, Ocado Group still made a £44 million loss in the last financial year, as it continues to focus on growing its international retail solutions business. Even though Ocado has been a big winner from lockdown, presumably if there are no profits, there are no excess profits to tax?”

Recovery bonds and NS&I

“Keir Starmer has put forward the idea of a Recovery Bond, to try to mobilise the £125 billion of excess savings consumers have made throughout the pandemic. The Recovery Bond would presumably function a little like an NS&I savings account, but strip out the branding, and it’s simply government debt by another name. 

“The Budget will announce NS&I’s financing target for 2021/2022, which will give some indication of whether savers can expect any increase in interest rates, following the big cuts NS&I made in November. NS&I’s borrowing target was increased from £6 billion to £35 billion mid-year to help pay for the pandemic. However following NS&I’s rate cuts, so much money has walked out the door, it’s in danger of falling short of that target. It doesn’t seem too likely the Chancellor will resort to creating new NS&I products in the way his predecessor George Osborne did with “Pensioner Bonds”. Any premium used to lure savers in simply means the taxpayer footing a higher interest bill, and given the state of the public finances right now, that just doesn’t stack up.”

Laith Khalaf
Financial Analyst

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

Follow us: