Which taxes could rise at next Budget?
In a major speech before the Budget, Rachel Reeves appeared to pave the way for significant tax rises, saying “easy answers” were off the table.
It is the harshest warning yet from the chancellor, who has been signaling for the past few months that tough choices will have to be made.
Many economists predict significant tax increases can be expected in the Budget as Ms Reeves tries to offset the country’s poor economic performance.
Researchers from the Institute for Fiscal Studies (IFS) have found that the chancellor will need to find at least £22bn to plug the government’s fiscal deficit, as rising borrowing costs and weak growth forecasts significantly narrow his room for manoeuvre.
Speaking in Downing Street on Tuesday morning, Ms Reeves said: “Politicians of recent years have become addicted to spending money on short-term sticking solutions rather than making long-term economic plans.”
Further fueling speculation is No 10’s apparent reluctance to recommit to Labor’s manifesto commitments not to increase headline rates of income tax, VAT or national insurance contributions.
Economists, who are among the three largest sources of tax revenues, pointed out that this decision limited the Chancellor’s options. His latest remarks may signal an intention to at least partially back away from the commitment, in light of difficult economic conditions.
Some of the other options the Chancellor may consider ahead of the Budget on 26 November include:
Tweaking VAT
Passive language on Labour’s tax commitment has led to some speculation that the Chancellor may consider some form of increase in VAT.
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The Chancellor is unlikely to increase the main rate of VAT, which currently stands at 20 per cent on most goods and services. The tax is often passed on to customers and, given recent warnings about living standards and inflation, this could mean further hardship for already struggling households.
A different route the Chancellor could take (possibly still in line with Labour’s commitments) would be to make the VAT rate uniform.
Food is one of the most complex areas from a tax perspective; While products such as confectionery, hot meals and ice cream are subject to standard VAT, meat, vegetables and fruit juices are not subject to standard VAT.
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This was a measure recently backed by the Institute for Government (IfG) and pointed to a case in which the court ruled that giant marshmallows should not be liable for standard VAT because they should not be considered confectionery as they are unlikely to be “normally eaten with the fingers”.
Stamp duty and municipal tax renewed
Ambitious plans are reportedly being considered to replace both stamp duty and council tax with two new “land taxes” that would arguably be fairer.
Stamp duty will be replaced by a “national” land tax, a new tax on the sale of property valued at more than £500,000. This tax will be proportional to the value of the property and will be paid at the rate determined by HMRC.
This amount will only be paid by the new owner of the property over £500,000.
The second part of the plan would involve replacing the municipal tax with a new “local” property tax. This will be calculated based on the property value paid by the owner and at a rate determined by each local authority.
The report on which the plans are based suggests the tax should be applied to values up to the £500,000 limit. This would ensure that the wealthiest areas cannot set rates that are so much lower than those with less valuable properties.
This will address a major criticism of the council tax system, namely that the way properties are assessed is unfair and flawed. The council tax “band” that all properties pay is based on values last assessed in the 1990s, which are largely outdated in many places.
The local property tax concept would instead involve taxing properties based on their value at the last point they were sold, meaning the valuation would be updated regularly.
mansion tax
In the UK, capital gains tax is payable on the sale of most high-value assets. This includes estates, stocks and estates worth over £6,000.
Under current rules, a homeowner generally does not need to pay capital gains tax on the sale of a property that was his or her primary residence while he or she owned it.
This will change under proposed plans when the property value of the home being sold is £1.5 million or more, but this threshold is said to be under consideration.
The operation of capital gains tax on real estate sales requires sellers to calculate the “gain” they receive from the asset. This is usually the difference between what they paid for the property and what they sold the property for.
If it is above this value, or if the seller gets capital gains tax relief (£3,000 each year) above this value, they will need to report and pay the tax.
For higher or additional rate income taxpayers, the rate is 24 percent. For those with a basic rate, the rate is 18 percent.
A simpler version of the “mansion tax” has also been introduced closer to the Budget. This would involve imposing a levy on property owners valued at at least £2 million; such tax will be subject to an annual fee of 1 percent of the amount above this threshold; This means an annual fee of £10,000 for homes worth £3 million.
Change in pension tax
Another tool Ms. Reeves could use would be to change pension policy to attract funds from wealthier retirees.
Analysts at LCP, including former pensions minister Steve Webb, have warned against the move, sharing their views on how the chancellor could change pensions.
One of the most common speculations is that higher rates of pension tax relief will be cut. This is the policy that, with the addition of HMRC, effectively increases savers’ contributions.
Savers paying basic rate tax receive a 20 per cent increase in their pension contributions, while higher rate taxpayers receive a 40 per cent increase and additional rate taxpayers receive a 45 per cent increase.
The scheme effectively ensures that no tax is payable on pension contributions. It is designed to encourage people to save more for retirement because income that would be taxed as wages can be used as retirement deposits virtually tax-free.
Rumor has it that the proposal would cut this aid for high-income earners; This means everyone will receive pension tax relief at a flat rate of 20 per cent, regardless of their income tax bracket.
A report from the IFS last year found this would create an additional £15bn a year for the exchequer, with the majority of this coming from the top five earners.
