Investors have been warned to brace for a slew of tax rises this autumn as Chancellor Rishi Sunak looks for ways to claw back some of the huge cost of Covid-19 rescue measures.
The weekend brought reports that the Budget set for November may contain tax increases aimed at the wealthy and business, including hikes to Capital Gains Tax, Corporation Tax and a raid on pensions.
Were the Chancellor to follow through on all the reported changes it would represent one of the largest tax raids in memory. On Corporation Tax, the current 19% rate could rise to 24%, reports say. The effect would be felt by companies but also investors - higher tax means less is left for companies to reinvest in their business or to pay out in the form of dividends or share-buybacks.
Meanwhile, Capital Gains Tax could be overhauled so that rates match those of Income Tax. That means the tax rate on liable gains would rise from 10% (or 18% on gains on second homes) for basic rate taxpayers to 20%, while for higher rate and additional rate payers CGT would jump from 20% (28% on gains from second homes) to 40% for higher rate payers and 45% for additional rate payers.
Such a change would make the benefits of saving and investing tax-efficiently even more important. Gains made on investments inside ISAs or pensions are tax-free, while pension contributions normally benefit from tax-relief as well - or at least they do for now. The Treasury is also reported to be looking at changing pension tax relief to make it less generous to higher earners, who currently get the greatest potential benefit from the system.
A further potential change could make the State Pension less generous in the future. Currently, the ‘triple lock’ policy means the payment rises by at least 2.5% each year, or by the rate of inflation or wages rises if those are higher. The Chancellor may look to replace the triple lock, meaning future rises to the State Pension are potentially lower.
Will these tax rises happen? History suggests probably not, or at least not to the extent speculated. It has become traditional ahead of Budgets for government to ‘fly kites’ on tax reform to lower expectations (so as to take credit when softer changes come through) and to scope the possible reaction to potentially unpopular announcements.
But that doesn’t mean some of these changes won’t make it onto the statute book eventually. The Chancellor is that rare thing - a popular politician. He has been the front man for several well-received stimulus measures during the pandemic, including the furlough and ‘Eat out to help out’ schemes. He won’t want to dent that popularity but will also be aware that if there’s any moment he would be forgiven for raising taxes, it’s now. Huge bills from extra government borrowing are mounting and he will be keen to balance the books if he can.
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