Has the time come for Chancellor Sunak to tighten the purse strings?
HAVING been thrust into the role weeks before last March’s Budget, Rishi Sunak has recently celebrated his first year in office as Chancellor of the Exchequer. After a year everyone will want to forget, he now faces a herculean task of placing the UK’S finances on a sounder long-term footing.
The money spent protecting jobs and businesses throughout the pandemic was a lifeline for families in all of the UK’S four nations but came with a price tag running into the billions. Tackling the sheer size of the deficit is a precarious task. Timing is key, as is striking the right balance between focusing on growth initiatives and avoiding tax rises that put economic recovery at risk.
You don’t have to look far to see the impact the pandemic has had on people and their financial lives. As its bite intensified over the course of the year, the number of UK adults with low financial resilience grew from 10.7 million to 14.2 million. In Scotland, one-third of all adults are concerned about their ability to meet mortgage or financial commitments over the next six months. With people’s continued challenge to make ends meet and increased debt levels, charting our economic recovery and deciding on tax rises is far from simple.
So, what spending plans will the UK Government introduce? And, more specifically, which groups or methods of taxation will be targeted to help foot the bill?
It goes without saying, any solution is not straightforward. Few people like tax rises, but can a solution be found that avoids unintended consequences and delivers fairness from an intergenerational point of view? Higher tax rates don’t necessarily lead to more money in the coffers. And with it being vital that investing and saving in pensions continues to be rewarded, where does that leave Mr Rishi in terms of options?
Looking to workers, an increase to the taxation of income and National Insurance is possible. However, while it seems a simple route, it does go against the Conservative election manifesto pledge to not raise income tax or National Insurance (NI) contributions. Additionally, sticking to the manifesto commitment would also rule out any increase in VAT.
This may make a blanket increase to the headline rate of income tax or national insurance unlikely, but the Chancellor could consider other more targeted changes, such as levying national insurance on earned income after state pension age or aligning income tax and NI between employees and the self-employed. While the Scottish Government has powers to set rates of income tax, the broader tax structure, as well as NI, are set at UK level.
Could pensioners be in the Chancellor’s sights? The state pension triple lock has survived thus far, but raising state pensions at the highest of inflation, earnings growth, or 2.5% a year comes at a considerable cost to those of working age. Can it withstand pressure for much longer?
High on the list of possible targets are pensions tax relief and wealth taxes. The tax system can have a big impact on the most efficient ways of managing long-term saving and investment. It’s vital any changes to tax reliefs and incentives don’t discourage saving for retirement.
The Government is also increasingly focusing on pension funds as a source of investment to support economic recovery, including in infrastructure and the “green revolution”. Too drastic a cutback in pensions tax relief would clash with this initiative.
On pensions tax relief, the most recent suggestion involves a change to the tax breaks on offer to those saving in a pension. The rumoured move could see the introduction of a flat rate of relief at 25 per cent, rather than topping up individual pension contributions based on the individual’s “marginal” income tax rate. This would reduce the incentives for higher and additional rate taxpayers but would benefit basic rate and non-taxpayers. However, any change would be highly complex to implement.
Rumours also suggest an increase in the rate of capital gains tax (CGT) or a cut in the annual exemption could be on the cards. This could impact those investing outside tax favoured ISA and pensions wrappers (which offer exemption from CGT) as well as second home owners when they sell up. However, the Chancellor might want to avoid a tax rise for small business owners who sell their businesses, perhaps to fund retirement. In the spirit of encouraging entrepreneurship, this group might be given exemptions or extended reliefs were CGT to be increased.
So, all eyes will be on the Chancellor on Wednesday. Of course, he may decide to hold back on announcing any detailed measures, with the prospect of a further Budget in the autumn when, hopefully, our roadmap out of the pandemic will be clearer.
Mr Sunak recently said he never imagined he would be in this role, mainly because growing up he wanted to be a Jedi from Star Wars. He will certainly need to channel his inner Jedi to balance the books, recoup the billions spent on the pandemic and create economic bounce back.
An increase to the taxation of income and National Insurance is possible