Individuals and families who need to address financial planning issues relating to UK Capital Gains Tax, Income Tax, and Inheritance Tax may have just had a reprieve.
The UK’s autumn (main) Budget was recently delayed with little fanfare. The Budget will now likely take place in March 2021 giving the Chancellor, Rishi Sunak, more time to assess the damage Covid-19 has done to our economy.
However, the delay may not all be to do with Covid-19. The ongoing free trade talks with the EU are also likely to be playing on Rishi’s mind.
The next Budget, whenever it comes, will likely be one of the most unpredictable in recent history. In this article, read about what caused the delay and what may happen in the next Budget.
Assessing the impact of Covid-19 on the UK economy
The obvious reason why the Budget was delayed, Covid-19, has bulldozed through the country’s finances. We know the economic effects so far have been significant, but there are so many factors that give an incredible level of uncertainty over the timing and scale of any economic recovery.
It is understandable that the Chancellor will want to wait and see what happens for a few months longer. This will help him better understand what policies are needed for the UK to emerge in the best possible position.
Brexit – UK/EU Free Trade Agreement
Another potential reason the Chancellor delayed the Budget could be the uncertainty surrounding the UK/EU free trade agreement (FTA) discussions. Currently, we do not know whether an FTA will be struck nor, if one is, the contents of the FTA.
If there is an FTA, some existing restraints on what Rishi Sunak can and can’t do will likely remain in place. For example, he may not have full control over VAT rates. Also, he may not have full flexibility with certain policies without falling foul of competitive advantage rules.
This may apply to state bailout packages (like 2007/8 with the banks) and maybe even business tax rates.
However, if an FTA isn’t agreed, the government may reduce VAT on certain items and create competitive advantages in comparison to EEA countries.
Inflation or deflation?
Another benefit which arrives from delaying the Budget it to have a better idea regarding inflation forecasts. Inflation or deflation? This is a question which is creating debate for economists due to Covid-19.
Perhaps the Chancellor also wants to see what happens with inflation before deciding whether to slam the brakes on spending or turn up the tap.
Austerity on the way?
With national debt having recently passed £2 trillion, the Chancellor will need to consider his options wisely.
Some believe that he will need to rein in spending and/or increase tax revenue to ensure debt levels do not rise too far. However, this isn’t as straightforward as one may think.
Increasing taxes can reduce overall tax revenue, which would be an unintended consequence. Higher levels of taxes can stifle enterprise and slow down economic activity, and effectively strangle the economy before it has chance to recover.
Therefore, although it may seem counterproductive with debt rising so quickly, Rishi Sunak may decide to cut taxes and/or increase spending to stimulate the economy, a move which is likely to be needed in 2021 as we recover from Covid-19 and any potential issues with the UK/EU FTA.
If the Chancellor goes down this path, it is unlikely that Income Tax and National Insurance rates will increase.
If possible, a short-term cut to VAT may be on the cards. He has already done this for the hospitality sector; however, he could extend this to other sectors too, through reducing the standard VAT rate which is currently 20%. This happened during the last financial crisis when the standard VAT rate was reduced to 15%.
Another tax to look out for is Stamp Duty. The government has already significantly reduced Stamp Duty rates until 31 March 2021. This is seen as crucial to support the housing market and banks, which, in turn, helps to maintain liquidity in the financial markets. A further short-term extension of this Stamp Duty cut wouldn’t be unreasonable.
Spending may also be increased on infrastructure projects such as large green energy projects.
Long term – more taxes for the ‘rich’
However, whatever the Chancellor decides to do in the next ‘delayed’ Budget, the increase in national debt means we should expect taxes to increase in the longer term.
The easiest option for the government to raise money (while attempting to remain popular) is to increase (and create) the ‘stealth’ taxes, which are taxes which aren’t easily visible or aren’t paid by most people directly.
Many of these taxes are aimed at the rich, deemed to be the people with the broadest taxpaying shoulders.
This means Income Tax and National Insurance don’t usually increase often (except possibly for the highest earners). However, taxes such as Fuel Duty, Vehicle Exercise Duty, VAT, Capital Gains Tax, and Inheritance Tax will likely be firmly in the cross hairs.
Other taxes (or removal of preferential tax treatment) may also include new green taxes, changes to pension tax relief on contributions, and changes to the existing typical tax-free pension commencement lump sum.
However, the government has already mentioned that they have no intention to review pension tax relief for the next 12 months. You can read more detailed information on pension tax relief in our Guide to UK Pensions.
Corporation Tax may also increase, due to it being potentially more politically acceptable to increase tax on companies rather than on people. However, individuals would likely be affected by this anyway due to increased prices, lower or frozen wage rises, and reduced employment opportunities.
All in all, it is a very uncertain time for the country, the wider global economy, and everyone in it. It is likely the Chancellor himself doesn’t quite know what is best for the UK economy currently. So, we’ll have to wait a few more months to see what he has in store for us all, in his little red box.
Get in touch
If you want advice on what potential tax changes mean for you, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Note – any views and opinions expressed in this article are those of the author only and may not be correct. This article does not constitute financial advice and you should always consult a qualified financial professional before undertaking any financial changes. This information in this article is correct as at 1 October 2020. Government legislation can change at any time.