Many people are predicting what the Chancellor’s Autumn Budget will include.
Chancellor of the Exchequer Rishi Sunak’s imaginative Eat out to help out scheme was highly popular. Designed to give the restaurant sector a boost in August, it was the latest in a long line of Government initiatives to support business and mitigate the economic damage caused by the Covid-19 pandemic.
But now that we are in September, with schools and offices reopening, thoughts are turning to the Autumn Budget. Will the Chancellor be asking individuals and businesses to “tax up” to “help out” the UK economy and balance the books given the unprecedented levels of Government spending and borrowing over the past six months?
As yet no date has been set for the Budget although the end of October or November look likely.
Why the Autumn Budget will be a balancing act
Sunak will have a balancing act to play. If he announces significant tax rises, economic recovery could be stunted and more business closures and increased redundancies could result. The Job Retention Scheme ends on 31 October. In addition, deferred income tax and VAT payments will fall due for payment early in 2021. Many businesses and their owners are already under cashflow pressure. Conversely, however, the various Government business support schemes have to be paid for so some tax rises do seem likely.
What tax changes might, therefore, be announced this Autumn? What follows is a subjective view on what might change, and my own view on the likelihood of such changes.
Will the Government break its “tax triple lock” commitment not to increase income tax, National Insurance contributions (NIC) or VAT rates?
This may be unlikely politically but there are a couple of potential areas which could be reformed under the guise of simplification.
Class 4 NIC for the self-employed on trading profits between £9,500 and £50,000 could be increased from 9% to 12% to align with the Class 1 NIC rate applying to employees.
Income tax on dividend income could be increased from 7.5% / 32.5% / 38.1% to 20% / 40% / 45% so that dividend income is taxed at the same rates as employment income, self-employment income, rental income and interest income.
Pensions tax relief costs the Exchequer around £40 billion each year. It seems unlikely that the Government would abolish or restrict the 25% tax free lump sum, but could Sunak announce a 30% flat rate of tax relief for future pension contributions?
Corporation tax has reduced from 28% to 19% over the past decade so that it is one of the lowest rates in Europe. Could the rate be increased again without making the UK a less attractive environment for UK corporates?
Following a recent review, the Government may also be eyeing up certain valuable inheritance tax reliefs such as Agricultural Property Relief. 100% APR applies, inter alia, to let farmland but no inheritance tax relief is available for landlords of other let property, such as commercial or residential property. Sir James Dyson, who allegedly owns 30,000 acres of farmland, and others will be taking a keen interest on whether the Government restricts APR.
Capital Gains Tax (CGT) rates are at historically low rates with a maximum rate of 28% applying to residential property gains. I think it highly likely, and consistent with earlier tax measures applying to residential property, that CGT rates on residential property gains will be aligned with income tax rates (i.e. increased to up to 45%). Under the new 30-day CGT reporting and payment regime, the Government would see the cashflow benefit of increasing CGT on residential property gains immediately.
Conversely, I suspect that CGT rates on other gains will be maintained or, at worst, increased marginally. And, given that Business Asset Disposal Relief for entrepreneurs was not completely abolished in the March 2020 Budget (albeit that the individual lifetime limit of qualifying gains was reduced from £10m to £1m), I would expect the Chancellor to leave this relief alone in the Autumn Budget.
I also consider it probable that the Annual Investment Allowance, which is currently £1m but is scheduled to reduce back to £200,000 on 1 January, will be maintained at £1m for the 2021 calendar year so as to incentivise businesses to invest in plant and machinery going forward.
The Autumn Budget will be an absolutely critical stepping stone on the path to the UK’s economic recovery, and we eagerly await its tax announcements.
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