Inflation fears amid Sunak’s smash and grab tax raid
GUIDE TO... HOUSING MARKET STIMULUS
EVERYBODY knew Chancellor Rishi Sunak would hike taxes to pay for his Covid bailouts, and many will have breathed a sigh of relief onwednesday when the medicine was less brutal than expected.
That is a sign of how desperate things have become, given that he still hit people and businesses with a whopping £30billion worth of tax increases. Freezing the personal allowance means millions of us will pay more in income tax, while the better off will face more punitive tax charges on pensions, capital gains and family inheritances.
There is another danger. Financial analysts are warning that inflation is set to make a comeback, after years when prices have hardly risen at all.
If prices and earnings start rising, more of our incomes will fall above the frozen tax bands, and end up in the Treasury’s coffers.
WHAT A DRAG
The Chancellor denied introducing stealth taxes on Wednesday, but freezing the personal allowance at £12,570 from next year until 2026, and the higher-rate threshold at £50,270, is without doubt an income tax grab.
Thanks to something called fiscal drag, as prices rise and incomes grow, more people will be dragged into higher tax brackets.
By 2025, some 1.3 million more lower earners will pay 20 per cent basic rate tax, while more than a million extra will be taxed at 40 per cent.this will cost a middle earner more than £500 over four years, while those on higher incomes could pay £2,500 more.
Kevin Sefton, chief executive of personal tax app Untied, said taxpayers will pay £9.1billion more in 2025/26 alone, but it will not end there: “This loss would be sustained each year even if allowances then move in line with inflation.”
There is not much you can do, except by earning less income, and few would choose that no matter how much they hate paying tax.
LIFETIME LOSS
Chancellors have been relying on fiscal drag for years.today’s inheritance tax (IHT) nil-rate threshold has been frozen at £325,000 since 2009 and will now stay there until 2026, an incredible 17 years.
The main residence nil rate band of £175,000 will also be frozen, dragging more people into the IHT net as property and share prices increase. Estates are set to pay an extra £985million by tax year 2025/26.
Sunak is taking the same approach with capital gains tax, where the annual allowance will be held at £12,570 from next year to 2026.
Pensions will also be caught in the fiscal drag net, as the lifetime allowance is frozen at £1,073,100 until April 2026, rather than rising each year.
Anyone who exceeds it will pay 25 per cent on income withdrawals, rising to 55 per cent for lump sums.
PWC calculates that someone aged 50 now could be £85,000 worse off in tax by the time they reach retirement, if it stays fixed.
While having more than £1million in your pension may seem like a nice problem to have, this move could hit the NHS as senior doctors may choose to retire early rather than build up more pension.
Hargreaves Lansdown senior analyst Nathan Long said others could also suffer: “In the longer term, this will end up being a tax on those successful in growing their pension.”
The lifetime allowance has now been cut from £1.8million since 2011. Pensions campaigner Ros Altmann said: “How does this enable people to make plans?”
BIG FREEZE
Moira O’neill, head of personal finance at Interactive Investor, said the Budget makes it even more vital to use this year’s tax-free Isa allowance before the annual April 5 deadline, as all returns are free of income tax and CGT. Fiscal drag is also at work here too. “The £20,000 Isa allowance may feel generous, but has been frozen at this level since 2017. If it had risen in line with inflation it would now be worth £21,516,” O’neill said. There is little chance that will rise before 2026.
‘If interest rates rose just 1 per cent, that
would add £20.8 billion to the UK’S debt interest bill’
TAX ATTACK
We all hope the economy rebounds strongly, as this is the best way of paying the coronavirus bill without bleeding taxpayers dry.
A wall of pent-up spending could boost growth when lockdowns end, but there is a growing worry this will also fire up inflation, once added to trillions of dollars in global stimulus unleashed to fight the pandemic.
If prices and wages accelerate, while tax thresholds stay fixed, Sunak’s stealth tax raid may resemble a smash and grab frontal assault.
Laith Khalaf,aj Bell financial analyst, said the Treasury may not be celebrating either, as higher inflation would also push up the Government’s borrowing costs.the Office for
Budget Responsibility says if interest rates rose just 1 per cent, that would add £20.8billion to the UK’S debt interest bill. “This would wipe out all the £8.2billion gain from freezing income tax allowances, and a sizeable chunk of the £17.2billion gain from higher corporation tax,” he said.
If inflation returns, last week’s tax raid will look mild compared to what may be coming our way.
THE HOUSING market has powered on despite the pandemic and last week it got another boost, when Chancellor Rishi Sunak extended the stamp duty holiday and launched a new mortgage guarantee.
The measures will keep the property market ticking over, but some warn that it is now being underpinned by taxpayer money.
Nobody wants to see a crash but today’s dizzyingly high prices are being propped up by near-zero interest rates and a raft of state-funded programmes that have created an artificial market.
This is forcing young buyers to borrow ever larger sums to get on the property ladder, and leaves them vulnerable to a crash if the Government cuts the purse strings.
On Wednesday, the Chancellor extended the stamp duty holiday by three months to June 30, to give buyers time to complete transactions. He also tapered the tax break, by reducing it from the first £500,000 of property value to £250,000 until September 30.
From October 1, the old system will apply, with only the first £125,000 free of stamp duty.
Like most in the property industry, Fabrik Invest managing director Dale Anderson welcomed the extension, but added a rare note of caution: “Relying on
false inflation to keep the market moving is far from ideal.”
Homeowners Alliance chief executive Paula Higgins warned the tax break has brought distortions. “Buyers should not see it as providing big savings, as house price increases may wipe out any gains,” she said.
The stamp duty holiday has actually made life harder for first-time buyers, by driving up property prices to all-time highs. Last week the Chancellor rushed to their aid by introducing another scheme, also on the taxpayer’s tab.
His new “mortgage guarantee” will encourage lenders to offer home loans to buyers with deposits of just 5 per cent, which are generally considered riskier.
Barclays, HSBC, Lloyds, Natwest and Santander will offer 95 per cent loan-tovalue (LTV) mortgages under the scheme from April, but Higgins said: “Buyers may get significantly cheaper deals if they can save a 10 per cent deposit.”
She said first-time buyers should consider other forms of help, such as the Lifetime Isa, which gives younger savers a government-funded top-up, worth up to £1,000 a year on maximum savings of £4,000.
Higgins also alerted buyers to the Help to Buy: Equity Loan scheme, which lets first-time buyers purchase a new-build with a five per cent deposit.
However these schemes do nothing to solve the underlying property shortage. Instead, they drive prices even higher and increase mortgage debt. If interest rates rise, the whole house of cards could come crashing down.
Professor Les Mayhew, global head of research at the International Longevity Centre UK, warned the mortgage guarantee “will not be welcome if its main effect is to increase house prices further without increasing supply”.
Now that the Government has established the principle of supporting today’s inflated property prices, it has to keep pumping in cash to forestall a crash.
Whether this is a correct use of taxpayers’ money has been forgotten.