In recent weeks, the government has committed to eye-watering levels of borrowing in order to navigate the country through the coronavirus crisis. With tax receipts also falling, experts are warning that taxes could rise dramatically once the pandemic is over.
Tax receipts in March were down £2.2 billion, compared with the same period last year, while the government plans to borrow £225 billion from bond market investors in just four months to fund the huge increase in public spending during the coronavirus pandemic.
All this could see the most significant changes to the tax system since the Second World War, tax experts have predicted.
The parallels between the two periods are stark. Then, as now, Britain was faced with funding huge public debt. It also meant increasing duties without burdening the lower paid, who had shouldered a large share of hardship and fighting – just as it is the lower paid who are on the front line against the coronavirus.
Mel Stride, the Conservative MP who chairs the Commons Treasury committee said: “There will be very difficult choices, therefore, around spending on the one hand and taxation on the other.
“I think in the taxation debate there will be a very important debate to be had about who should bear the heaviest levels of additional taxation, especially when you think it is the lowest paid and often the youngest people who have been most impacted.”
There are three key areas where taxes could rise to fund the unprecedented spending that has been required in recent weeks – and many could hit wealthier people.
Inheritance Tax rises
The PAYE system was introduced in 1944, capturing the salaries of lower and middle earners, while levying duties as high as 97.5% for those earning the very highest incomes.
Inheritance tax, then called ‘estate duty’ was raised to 80% after the Second World War and hit 85% in 1969.
Today, Inheritance Tax stands at 40%. While there were rumours that the Chancellor might reform the tax in his first Budget, no changes were made – although these reforms could be revived to raise much-needed cash.
Mike Warburton, the Telegraph‘s tax columnist, said the government was unlikely to increase rates to the levels seen in the 1940s, but said some sort of increase was inevitable.
However, Sean McCann of insurers NFU Mutual said it was more likely current reliefs, such as being able to pass on unused pension assets tax-free and the ‘seven-year rule’, which exempts gifts survived for seven years or more, would be scrapped to raise extra cash.
Whatever the Chancellor decides, it’s reasonable to expect some changes to Inheritance Tax during this parliament. So, now could be the time to act in order to benefit from some of the reliefs and exemptions available.
Could wealth taxes be introduced?
A leading think tank has called for wealth taxes to be introduced after the pandemic in order that the wealthiest in the UK can play their part in funding the recovery after Covid-19.
Tax Research UK director, Richard Murphy, says that tax rises should be targeted at those with the greatest capacity to pay and that the government has the potential to raise up to £174 billion a year if it taxed wealth at the same rate as income.
Murphy, of London’s City University, said his analysis of data between 2011 and 2018 showed income was taxed on average at 29.4% while wealth was taxed at 3.4%.
Murphy says that taxes should target those in the top deciles of income earners and wealth owners in the UK. He added that the effective tax rate for the wealthiest 10% of the population – once income and wealth were combined – was 18%, less than half the 42% tax rate for the bottom 10%.
“This has massive implications for the forthcoming debate on who, if anyone, should pay for the coronavirus crisis,” he says.
“What is clear is that the only fair answer will be that those on the highest incomes, and those with wealth, are the only people who could afford to pick up that bill. If anything, everyone else needs a tax cut just to help them survive. Any politician with any concern for tax justice will have to understand this.”
While the professor said he was not campaigning for a wealth tax as such, he suggested there were a number of ways the government could pick ‘low-hanging fruit’, including:
- Introducing a Capital Gains Tax (CGT) charge on former main residences passed on after death, with the exception of cohabiting spouses and civil partners and recognised long-term related carers. Due to the Residence Nil-Rate Band, a married couple can leave a property worth up to £1 million free from Inheritance Tax
- Equalising the tax rates on income and capital gains
- Significantly reducing the annual CGT allowance
- Abolishing higher-rate tax reliefs for pension contributions.
Changes to self-employed taxation
During the Downing Street press conference when he announced the government’s Self-Employed Income Support Scheme (SEISS), the Chancellor was at pains to point out that the support for self-employed individuals was comparable to employed workers.
Taking this into account, Rishi Sunak hinted that self-employed people may therefore pay more tax in future.
The Chancellor said: “If we all want to benefit equally from state support, we must all pay in equally in future. It is just an observation that there is currently an inconsistency in the tax treatment of the employed and self-employed”.
This could result in changes to self-employed taxation rules in the future.
Get in touch
If you have any queries about potential future tax changes and how you might mitigate these, please get in touch. Please email firstname.lastname@example.org or call 01454 416 653 to find out how.