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Leading to the week starting on the 22nd March, many speculated that a “Tax Day” was coming. The expectation was that the government would close a series of tax loopholes and introduce a range of “green levies” to help stabilise the economy from COVID-19, whilst closing loopholes and moving the country closer to its vision of a more environmentally friendly economy. On the 23rd March, Tax Day did indeed come – but not in the way many had expected. Reforms were not as wide-ranging and drastic as anticipated, although they did bring a range of important new changes for financial planning.
With these changes, the government has also potentially kicked the can down the road. After all, the UK is still hugely in debt after borrowing billions to support the population through the pandemic. At some point, many expect that taxes will need to be raised to address this.
So, what was “Tax Day” meant to bring in March? Could any of these measures be suggested again down the line, and what do the immediate measures mean for a financial plan? At Cedar House, our team addresses some of these questions below.
If you’d like to find out more or discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Tax Day in March 2021: the expectation & the reality
Having consulted for a number of years on how to modernise the UK tax system and claw back some £31bn in lost receipts, the UK government published a range of consultations which had been left out of the March Budget. HM Treasury did not change pensions tax relief or changes to capital gains tax, as many expected (and perhaps feared). Yet it did bring a host of significant announcements which will particularly affect small business owners.
IR35 – after years of postponement – is finally being rolled out. Many anticipate that the result will be worse pay deals for freelancers as the government tries to make their tax status more like employed workers – but without the extra benefits (e.g. pension contributions from an employer). There are also Treasury plans to bring in a “pay-as-you-go” tax system similar to the model used in New Zealand. This will effectively abandon the annual/bi-annual manual tax return system, which would be perhaps the biggest overhaul for 50+ years. For people who are not self employed, this may sound insignificant. Yet the IPSE (the Association of Independent Professionals and the Self-Employed) argues that it is likely to massively impact how small businesses are run, possibly leaving many with less cash savings to buffer hard times.
Two other significant changes were announced on the 23rd March. First of all, frequent flyers will likely be required to pay more tax in “green levies” (more details to follow). Secondly, those with a holiday let will receive fewer tax perks. Previously, such second homes were not subject to council tax, but rather business rates – where owners could receive 100% relief. New rules will only permit this if owners can prove that properties are genuine businesses.
Another possible Tax Day in the future?
At Cedar House, we have been watching the news carefully for many years to try and spot any signs of tax changes/rises down the road. Similar themes tend to come up repeatedly, and have come into sharper focus due to higher public debt caused by COVID-19. Whilst no one can say if any of these will certainly transpire – and, if so, exactly when and in what specific form – they could include the following:
- Business rates reform. Business rates are based upon a property’s ‘rateable value’. A ‘multiplier’ is then used to calculate the rates bills (i.e. 51.2p for properties valued at £51,000+). Many feel this unfairly taxes high street businesses and provides favourable tax rates to online businesses. The government could announce new changes in the autumn, but has paused reforms for now (e.g. calls for a 2% online sales tax).
- Pensions tax relief equalisation. Tax relief costs the Treasury a lot of money – £37.2bn in 2017-18, for instance. There have been calls for the government to lower the 40% relief offered to Higher Rate taxpayers, possibly down to 20% to match the Basic Rate. Other people have called for a flat 25% relief rate for everyone.
- Capital gains tax rise. In 2021-22, capital gains tax is lower than income tax rates. Yet this was not always the case. During the Thatcher Years, for instance, they mirrored one another. Since there is a precedent, it is not inconceivable that these rates could return.
- Inheritance tax (IHT) reform. The UK’s inheritance tax regime is notoriously complex and many people have called for radical reform to simplify it – possibly jettisoning tax perks such as IHT exemptions on gifts whilst lowering the overall IHT rate.
- Trust taxation changes. The government consulted on whether/how to change trust tax between the 7th November 2018 and 28th February 2019. Reform has been paused for now. Yet future changes could involve scrapping the “7-year rule” which allows a person to put up to £325,000 (their IHT nil rate band) into a trust every 7 years without needing to pay the 20% entry charge.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk