The UK is witnessing debt-to-GDP levels unseen since World War II due to Covid’s massive economic impact. Substantial monetary and budgetary actions have been taken, including various government-backed aid packages, yet alternative revenue sources are crucial.
The discussion about bridging the gap between government spending and revenue might intensify due to Covid, prompting inevitable adjustments in the UK tax structure—an imperative measure to raise funds and curtail the national debt’s rise.
The spring budget on March 3rd, 2021, could introduce tax increases and new taxes.
WHICH TAXES WILL RISE, AND WHICH ONES COULD EMERGE?
The Treasury’s proposal to increase corporation tax by 5% to aid Covid debt repayment has shocked many, especially small businesses. The expected reduction to 17% in 2020 never happened, and Chancellor Rishi Sunak contemplates raising it to 24%. Economists and corporate execs criticize this for possibly stifling recovery. Such a step could further harm sole traders and those excluded from government COVID-19 financial aid.
Given Covid’s impact and Brexit reforms, Mr. Sunak might hesitate to impose such a substantial corporate tax hike.
Capital Gains Tax (CGT)
Most analysts agree on a likely CGT rate increase. Current CGT thresholds for basic rate taxpayers are 10% (or 18% on residential property) and 20% (28% on residential property) for higher rate taxpayers. These are much lower than rates on earned income, where 40% or even 45% are common. This raises concerns.
One proposal suggests aligning CGT rates more closely with income tax rates and reinstating relief for gains due to inflation.
Although a CGT increase seems inevitable, some might choose to retain assets instead of selling due to potential tax implications.
A Wealth Tax
In July, the Institute of Fiscal Studies introduced a “Wealth Tax” initiative to explore taxing assets. The Wealth Tax Commission’s December 9th report recommends considering a one-off “Covid Recovery Tax” for revenue collection. The commission didn’t suggest an annual income tax.
This seems less likely now than a few months ago, as Mr. Sunak rejected the Wealth Tax Commission’s recommendation to tax assets over £500,000, deeming it “un-Conservative.”
Despite revenue maximization needs, short- and medium-term tax hikes seem necessary. Advisers might suggest leveraging lower tax rates and modest asset prices before March.
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