Today we ponder on those things that might conceivably be done, when the time is considered right, to make the sort of difference that is likely to be required. These things outlined below are based upon (i) the fact that the big hitters in tax revenue are Income Tax, National Insurance and VAT; and (ii) the things which are known already to be in the mind of government.
The following is a risk list and is certainly not a wish list:
Income Tax and National Insurance
- Pensions tax relief
For a decade or more now we have been braced for a removal of higher rate Income Tax relief on pension contributions (that higher rate relief adding a further 20% relief above the basic rate relief rebated direct to the scheme).
While we might have become numb to the risk after so many false alarms, we must consider that Covid 2020 might prove to be the trigger which turns this perennial fear into reality. Taxpayers might want to think about the merits of contributions before the forthcoming Budgets in November 2020 and/or November 2021.
- The income level where the personal allowance (PA) is withdrawn
Since the advent of the withdrawal of the PA, we have had a regime under which the tax-free personal income allowance (currently £12,500) begins to be withdrawn as income exceeds £100,000 per annum. At £125,000 the whole of the allowance has gone, and in this £25,000 slice of the taxpayer’s income, they effectively suffer a rate of 60% as a result.
It would be a very easy manoeuvre to reduce the level of annual income at which the withdrawal of the PA begins, and take far more “well-paid” taxpayers into the highest effective rate on a part of their income. Could we therefore envisage the withdrawal threshold coming down from £100,000 to, say, £80,000?
- Harmonisation of National Insurance (NI) with Income Tax
The tie between NI and specific parts of public sector provision (i.e. health) has long ceased to exist but we continue to live with the phenomenon of two taxes levied on large swathes of the same income, subject to different rules.
A harmonisation of the rules into one combined tax has been avoided by government after government, no doubt convinced that the impact on the headline Income Tax rates would not be understood by the electorate and would therefore be political suicide.
Covid 2020, and the deficit consequences which arise from it, might present the best opportunity “in a generation” for this major idiosyncrasy to be addressed, without necessarily causing votes to haemorrhage to the opposition. With harmonisation would come the opportunity for further tax raising, in particular insofar as sources of income not currently subject to NI might effectively become so and/or an effective disappearance of the NI “upper earnings level” which currently limits the heaviest NI take on employees’ earnings up to £50,000 per annum.
- The Additional Rate
Taxpayers begin to pay the Additional Rate of Income Tax (currently 45%) at income in excess of £150,000 per annum.
That rate began life at 50% and, despite the contention that a return to the higher level might encourage migration of more top-earners and wealth-generators to overseas jurisdictions, we could easily envisage a return to 50%, with the precedent having previously been set.
- Closing the differential with dividend income
Despite the 2016 changes to the taxation of dividends which increased tax rates on dividends, designed to “level up the playing field” between taxpayers operating through either incorporated or unincorporated businesses, there remains a material difference between the tax an owner pays on dividends drawn from their companies as compared to director colleagues taking salaries and benefits. The NI costs associated with the latter typically substantially exceed the “premium” part of the tax rates applicable to dividends.
H M Government could go further than they did in 2016 to remove this differential as well.
- Aligning CGT with Income Tax
As already recently outlined, CGT is about to be scrutinised, to consider if it is “fit for purpose”.
The tax, on gains from disposals of capital assets, has traditionally been levied at a much lower rate than income. NB a disposal of shares in a qualifying business might involve 10% CGT while a corresponding income amount received by the taxpayer would suffer 38.1% (on a dividend basis) or even 45% (on another income source basis). The differential outcome is clearly large.
For this reason, among others, we fear that the outcome of the upcoming review could, in the current circumstances, involve some degree of alignment of CGT with Income Tax.
- The headline rate of CT
The UK’s headline rate of CT is 19%, irrespective of the size of the company involved or its profitability. The UK boasts the lowest nominal rate in the G20.
This arguably presents scope to the Government for upward movement. It might be noted that even Donald Trump’s revolutionary revision of the federal rate of corporate tax recently did not bring the US down as low as the UK level (and this is excluding the further State Tax rates applied to the same corporate income in that country).
- The big online retailers (etc.)
In view of the pre-existing debate (and dispute) regarding the sufficiency of taxation paid by the giant online retailers (et al) who are still currently able to shift a very large part of their profits to other tax-favourable jurisdictions, we must surely anticipate a further hardening of the UK’s position with regard to those overseas companies generating substantial income from selling in to UK customers.
Value Added Tax
- Rates and zero-rating
There may not be any particular obvious areas to pick on at the moment in relation to Value Added Tax (VAT), but this tax is one of the revenue-raising heavyweights and any plan of action involving significant tax increase is liable to look at VAT.
The standard rate of 20% could increase – there are overseas precedents for rates above ours.
The list of zero-rated supplies (education, children’s clothing, food, medical supplies, etc., etc.) could be squeezed further.
Controversial, yes, but, in a revenue crisis, we envisage that uncomfortable areas will be bound to be looked at.
- Inheritance Tax – Business Property Relief
We are already aware of the move to consider a removal of the (typically 100%) relief from Inheritance Tax associated with “Business Property”. This unlimited relief currently ensures that large balances of value within the estates of business owners are not taxed on death (or during their lifetime).
The long-threatened removal or reduction of this relief could become another reality (even if that proves to be part of a wider revision of the death duty). A loss of Business Property Relief to the business-owning community could be very serious.
We are in the business of helping our clients to plan their affairs tax efficiently, to execute commercial initiatives without tripping over adverse tax consequences, to access tax incentives where they fit with commercial and domestic objectives, and to manage taxpayers’ lives generally and legitimately to minimise the extent of taxation borne on their activities. We do not relish any of the above tax hike possibilities and we are very aware that few, if any, governments would have the desire (or indeed courage) to go as far as some of these thoughts suggest.
Nevertheless, as concluded in last week’s Tax Tuesday, we are bound to factor the risk of material tax rises into our planning discussions and clients always need to be alert to what the future might hold.
If you have immediate tax planning questions that you’d like to discuss, contact Chris Barrington, Tax Partner, or your usual relationship practitioner.