A recent Treasury review confirmed that the cost of battling the coronavirus crisis so far stands at £280 billion.
According to the BBC, the government’s expected borrowing for the year pre-Covid 19 was ‘about £55 billion.’ In reality, it borrowed more than that in May alone.
The borrowed money will need to be repaid and the books rebalanced. Tax reforms are one way the Chancellor might choose to do that. But what might change? And what would it mean for you?
Why might reforms be needed?
While the pandemic remains with us, the government has pledged to keep spending. The Chancellor recently extended the furlough scheme and the Self-Employment Income Support Scheme and committed to paying grants to businesses forced to close in Tier 3 areas.
With vaccine rollouts underway we can begin to hope for a return to normality next year. Once the UK’s finances stabilise, the job of clawing back the huge coronavirus overspend can begin.
Inheritance Tax is under increasing scrutiny. The Office of Tax Simplification (OTS) has released its recommendations following the Chancellor’s Capital Gains Tax review. And the State Pension triple lock is still under threat, in part due to complications surrounding the furlough scheme.
2021 could see significant tax reforms.
1. Income Tax, National Insurance, VAT
These three taxes make up more than half of the government’s revenue.
A freeze on all three was a 2019 Conservative Manifesto promise. In fact, the pandemic also led to the government introducing a temporary rate cut across certain sectors, as well as a VAT deferral scheme.
But future rises could still be on the cards.
The UK’s borrowing this year is second only to that during WWII. Income Tax reached 97.5% during that period and although a rise of that magnitude is not predicted, Paul Johnson, Director of the Institute for Fiscal Studies, has said that Income Tax, National Insurance or VAT would need to rise if we’re to see a real impact on the public finances.
Tax changes could mean lower thresholds, meaning tax becomes payable at lower incomes or increases for those in the highest bands.
2. Inheritance Tax (IHT)
The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG) suggested changes to IHT back in January 2020. It currently stands at 40% but historically, it has been higher. It rose to 80% during WWII and reached 85% by 1969.
The APPG didn’t recommend increasing the rate to those heights, but 2021 could see the scrapping of the ‘seven-year’ rule.
Currently, gifts you make during your lifetime can be made tax-free if you live for a further seven years after making the gift. IHT is payable on a sliding scale if death occurs before seven years have passed, with 40% payable on death within three years and nothing to pay after year seven.
Removing the seven-year rule, possibly replacing it with a flat rate of IHT at 10% for all gifts above £30,000, could increase IHT revenue and help to recoup some of the government’s coronavirus losses.
This could have a significant impact on your estate planning, so be sure to speak to us if you’re concerned about the impact of potential future changes.
3. Capital Gains Tax (CGT)
Back in June, Chancellor Rishi Sunak ordered a CGT review, and the OTS has now returned with its findings.
While Income Tax generates more than £190 billion per year, under current rules CGT generates less than £9 billion in government revenue. It is paid by around 300,000 people. OTS recommendations – if they are brought in – could double the number of people paying the tax and amount to revenue of £70 billion over the next five years.
One suggested change is aligning CGT and Income Tax rates
Under current rules, a basic rate taxpayer would pay CGT at 18% on gains from second homes and Buy to Let properties, and 10% on other assets. If you’re a higher rate taxpayer, the rates increase to 28% and 20% respectively.
Aligning CGT rates with Income Tax rates would mean a CGT increase to 20% for basic rate, 40% for higher rate, and 45% for additional rate taxpayers.
The State Pension triple lock
The State Pension triple lock is another area that will likely see reforms in 2021. The lock guarantees that the basic State Pension rises each year by the highest of:
- 5%
- The rate of inflation
- Average earnings growth
The furlough scheme threatens to cause problems in 2021/22 if changes aren’t made.
The millions of furloughed workers who received just 80% of their usual pay this year have pushed wage growth down by more than 7%. The Office for Budget Responsibility (OBR) predicts that this fall will lead to an 18% increase next year as the economy recovers and workers return to full pay.
Under the current triple lock, pensioners would receive a 2.5% increase, followed by an 18% increase the following year.
The triple lock has been under threat for some time. Could coronavirus hasten its axing? Although possible, a suspension or a smaller increase for the next year or two – 1% or 1.5% for example – might be more likely.
Get in touch
As the government’s coronavirus debt continues to mount, the likelihood of tax reforms grows too. It is too early to say what the Chancellor will opt for, but if you have concerns about the potential impact of future changes, now might be the time to act.
Get in touch and we can review your finances to help mitigate the impact of any changes and ensure that your long-term goals remain in reach. Please email hello@globeifa.co.uk or call 020 8891 0711.
