Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
As the voting closed, Jonathan Franks addressed the big question that we have been asked almost daily over the last few weeks. What taxes might go up?
Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
(4th Jul, 22:00)
The exit polls are in and the Labour Party are set to win their biggest gain in seats since 1945 with a huge majority of 170. Labour have said they won’t raise the main taxes (income tax, corporation tax, NIC’s and VAT), but government needs more money and fiscal rules will likely mean borrowing is not an option. So which taxes could they tinker with?
Here is a selection of tax changes that will not be seen to tax ‘working people’ (depending on how you define them), but could raise revenues. Their individual impact on tax revenues is not huge, but could help plug some of the holes.
We have to stress that if you were thinking of popping down to William Hill and placing a bet, unlike a leak about the election date, we have no inside knowledge. For the same reason, please don’t plan your affairs based on our guesses!
Capital Gains Tax (“CGT”)
This has long been a strong contender. For higher-rate taxpayers, the CGT rate is 20% and 24% on residential property gains.The annual exemption has been eroded year on year, but politically, CGT is seen as a tax which does not affect working people.
Government could tinker with CGT – applying the 24% rate to everything except, say, private company shares. Or they could go further and tax capital gains at the full income tax marginal rate so that a 20% taxpayer pays 20%, but a 40% taxpayer pays 40% and so on. There would be a great deal of complaining that it is ‘anti-business’, but that is a matter of perspective. It would be an easy win, but may discourage much needed investment, and would raise a relatively small amount of tax. It is likely that something will change here, though.
Statutory Apportionment
This is a blast from the past. Many businesspeople running companies keep their profits in the company like a money box. They pay themselves dividends or bonuses when they need the money, and pay tax on that. What they leave in the company suffers tax at 25% and can be left alone.
In the dim and distant past, when an owner-managed company retained profits, the Statutory Apportionment rules kicked in. If the company could justify why it was keeping the profits and not paying them as dividends, for example for required investment, there was no problem. However, if the decision not to pay dividends could not be justified, the shareholders would be taxed as if they had received the dividend anyway, based on a fair apportionment.
Practicality made this difficult to enforce because companies became expert at finding excuses, and HMRC does not have the resources to properly consider matters.
But, with the advent of AI, this has become a real possibility again. The potential tax revenue for government is large, but so is the cost of administrating it so it will be a brave Chancellor who introduces it.
Removing the Upper Earnings Limit
NIC’s are paid by employees on their income up to the Upper Earnings Limit (roughly the top of the basic rate income tax band). After that they pay a reduced rate currently 2%. This is a counter-progressive tax, and abolishing the UEL would be seen favourably by many. It would increase NIC’s paid by employees earning more than the basic rate threshold and could be a big winner for government, without affecting lower paid workers.
Such a change might allow the basic rate threshold to be increased at no overall cost to the government, and such a change would create a significant shift in the burden of tax from relatively low-paid people to the higher paid.
Inheritance tax (“IHT”)
This is a tax which the left in politics like and the right hate. It is the nearest thing we have to a wealth tax, by which in economic terms, when someone dies, 40% of their wealth gets transferred to government. As it stands it is highly divisive, for a few reasons.
- First is Business Property Relief, which broadly exempts from IHT entirely the value shares in a private trading company and assets used in a business. The relief is intended to allow family businesses to be passed from generation to generation without losing 40% of their value each time an owner dies. On the left of politics, this relief is seen as giving businesspeople an unfair advantage, while on the right, it is seen as ensuring business stay open and jobs are retained. BPR is very much a possible target, and it could tinkered with to at least disable the tax avoidance schemes by which some wealthy people shelter their funds in AIM listed companies (which can often count as qualifying).
- Alongside that is Agricultural Property Relief, which excludes 50% of agricultural property and land from IHT. This relief is also seen by some as unfair as landowners may often reduce IHT because they have a farm (we may wonder why Jeremy Clarkson got into farming). Its objective is to prevent the forced sale of chunks of land on the owner’s death, but it may well be that some policies might see that as a good thing.
- Finally, the level at which IHT kicks in (the tax free allowance) is only £325,000. In the South of the country in particular, many modest family homes cost much more than that. Even with the private residential home uplift to the allowance, very many modest homes are now caught by IHT, which is often seen as unfair.
IHT does not affect ‘working people’ by definition, so it is open season. Some call for a dramatic uplift to the tax free amount to say £2m, and then removal of the two exemptions (BPR and APR). The counter argument is always the same, and not without justification, which is that it will discourage the accumulation of wealth.
Capital Transfer Tax (“CTT”)
Another blast from the past, CTT is the predecessor of IHT. This was a fairly simple tax, with a few very difficult tricks in it. Subject to a lifetime allowance and certain annual exemptions, CTT taxed, and could tax again, not so much wealth as reductions in wealth. No-one much liked CTT, but it had one great advantage: it was so simple that it was almost impossible to avoid.
Stealth taxes
These taxes are subtle changes to the rules of tax which do not actually change any rates of tax but seek to disallow tax deductions or exemptions, or mess with tax thresholds. We have seen a lot of this under the current government, but unfortunately, the magic of the stealth tax invisibility shield has worn thin, and people can spot these things very easily nowadays.
What we say in the article is pure speculation. Please do not rely on our guesswork. The good news is that the author is not, and never will be, Chancellor of the Exchequer.
