Taxes will rise – but where?

The result of the general election did not come as a surprise to many, but it represents a dramatic reversal of fortunes for both parties since the 2019 election, when the Conservative Party won a majority of 80 seats. We have experienced a significant degree of political turmoil over the past decade, and hopefully, this will mark the start of a quieter period for the nation.  Sir Keir Starmer has begun his tenure as the 58th Prime Minister of our country with an unenviable list of challenges, but hopefully, he and his team will deliver the change and growth they have promised.

Labour has been relatively clear that certain taxes will rise, such as VAT on private school fees and increased taxes for non-doms. They have also stated that certain taxes will not be raised, mainly the general level of VAT, national insurance, and income tax, though the freezing of income tax thresholds will mean more people are paying more tax. The aforementioned taxes that are not going to be increased account for roughly 75% of the overall £830bn collected in taxes by His Majesty’s Government. That still leaves 25% of the tax take that could be subject to increases, especially as Labour has not been as clear about them. It is important not to try and pre-empt potential tax increases too much, and these remaining taxes are unlikely to be addressed until the Budget at the end of October. I will briefly review some of the main areas where we may see tax increases, in the hope of providing some insight.

Capital gains tax (CGT) makes up a relatively small proportion of the tax take in the UK (£16bn or about 2%) and is levied on profits made on certain investments. The current rates vary between 10% and 28%, and the annual exempt amount of gains is typically £3,000, down from £12,300 several years ago. There has been speculation for some time that CGT rates may move up to a flat rate of tax in the 30-35% range, or that they may be aligned with marginal income tax rates, i.e., 20%, 40%, or 45%. Labour has re-imagined itself as a pro-business party over the past few years, so I would find it difficult to see them increasing CGT rates for business owners, as this would negatively impact the economy. However, it is plausible that they could raise rates for ownership of listed shares and for people with multiple properties (whether rented or second homes). The trouble with this is that it would have a knock-on impact on certain parts of the economy and capital markets, and research suggests that moving CGT rates too high may actually lower the overall amount of tax collected, as asset owners become more strategic about how and when gains are realised. On the balance of probabilities, I think we will see increases in CGT rates at the Budget.

The benefits of ISAs are well known by the public, whether they are stocks and shares ISAs or cash ISAs. The current allowance is £20,000 per annum, which allows individuals to shelter assets from income tax or CGT. There had been some progress in the previous Parliament about increasing the allowance by £5,000 if that extra allowance was invested in the UK stock market. This was a relatively sensible policy, but it is unlikely to be progressed given other priorities on the legislative agenda. I think it is unlikely that they will remove the £20,000 allowance, but also unlikely that it will rise above £20,000, given that the majority of individuals do not manage to save £20,000 into an ISA each year. It is a shame that it is unlikely to increase, as the annual allowance looks low compared to other countries’ equivalents of the ISA, and we should be encouraging more of a saving and investing culture within the UK.

The government has been trying to foster a culture of saving for retirement, with the advent of auto-enrolment into pensions in 2012, pension freedoms, and the tax relief that is available to those saving into a pension. The government adds an amount equal to the basic rate of tax (20%) to pension contributions, and further relief is available to higher and additional rate taxpayers via their tax return. In simple terms, to put £100 into your pension, it costs a basic rate taxpayer £80, a higher rate taxpayer £60, and an additional rate taxpayer £55. This relief, along with some other associated reliefs, costs over £50bn each year, a huge sum compared to many other taxes. Labour has not been clear about their intentions for tax relief on pension contributions, though they have been slightly clearer about the much-coveted tax-free cash that pensions can provide at retirement. Starmer made an ‘old-fashioned mistake’ when he implied he would abolish tax free cash during the election campaign. I think there is a chance that Labour may abolish tax relief at your marginal rate of tax (i.e., 40% or 45%) but introduce a flat rate of relief at maybe 30%. This would benefit basic rate taxpayers but penalise higher and additional rate taxpayers. Doing so would likely provide billions of pounds for the government while being popular with some. Saving for retirement is vitally important, and I hope that the government does not put barriers in place that could lead to lower savings for retirement.

Finally, inheritance tax (IHT) was not really mentioned much in the election campaign, but speculation about the tax has mounted in recent weeks. IHT is levied on about 4% of estates and raises around £8bn each year. IHT is one of the most hated taxes in the UK, as many people feel that they have paid taxes all their lives, and then the government takes 40% of their estate. Clearly, it is not as simple as that, and exemptions are in place that mean tax is only payable at 40% above a threshold of £325,000 to £1m, depending on your circumstances. There are plenty of legitimate ways that people can structure their affairs to minimise the amount of IHT that is payable on death, and some of these provide much-needed support to small companies and vital industries such as renewable energy. Changing IHT rules would significantly impact these parts of the economy and would likely cause much more damage than the increased tax receipts it might provide. It is likely that reform of IHT will happen at some point during the coming months or years.

There are several areas where a Labour government may seek to raise taxes, but hopefully, they will take a pragmatic approach. However, if they can revitalise the UK economy, then large tax increases may not be required at all. I am sure we are all hoping that the new government can deliver on its promises of change and growth and that I will not be penning another post-election article for quite some time!

My next article will look at where I feel the government has scope to improve the financial well-being of the nation through the lens of financial services. I bet you can’t wait for that article..

ABOUT OUR AUTHOR:

Dan joined BRI in 2011 and has held roles of increasing seniority within the investment team at BRI. Dan left BRI in 2017 to conduct an MBA at Warwick Business School, specialising in the strategies of high growth companies. Dan was appointed to the position of Chief Executive in April 2022. Dan is a Chartered Fellow of CISI, holds an MBA from Warwick Business School, and is the Chairman of a charitable trust. Dan regularly features on television and in national newspapers commenting on investment and finance matters. Dan has also been awarded the Citywire top 30 under 30 rising stars of investment management three times and the IOD West Midlands Young Director of the Year in 2016.

“If you would like assistance with financial planning matters, then please don’t hesitate to contact me via dbw@brigroup.co.uk”