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At the time of writing, many UK households are facing financial pressure as a result of the COVID-19 lockdown. By the 8th of April 2020, as many as 2m people in the UK had already lost their jobs; almost twice the number lost during the 2008-9 financial crisis and eradicating the previous five years of employment growth. Many others have experienced a reduction in earnings worth hundreds of pounds per month, after they have been furloughed and led to access the UK government Job Retention Scheme (covering 80% of wages up to £2,500pm).
Unfortunately, the outlook for the UK economy in 2020 is still looking uncertain, and some in the media have speculated that tax rises might be on the horizon to help pay for the government handout in the March Budget. This article offers some thoughts on the likelihood of these tax rises coming to pass, and if so, what form they might take.
Please note that no financial adviser can predict the future, but it can help to plan for some of the possibilities to protect your family’s wealth and finances. For more information and bespoke financial advice, please contact our team via:
020 8366 4400 or firstname.lastname@example.org
The 2019 Conservative manifesto
Prior to the 2019 UK general election, the victorious Conservative manifesto pledged to not raise income tax, National Insurance and VAT. However, their election win was achieved before COVID-19 started sweeping the globe from January 2020, which has dramatically shifted the economic environment and resulted in a huge shift in the prevailing political narratives. Brexit, which dominated discourse in Q4 of 2019, has moved to the background as leaders’ immediate concerns turn to containing the outbreak.
This new context could lead Conservative politicians to argue that the UK’s economic position has changed, leading to huge borrowing and spending promises in March 2020 which will, oner or later, need to be paid for. Indeed, official figures project UK government borrowing to be £273bn this year, and spending to exceed £1trn for the first time in history (i.e.51.7 per cent of national income). To cover this, many commentators are currently arguing that the Chancellor, Rishi Sunak, will have little choice but to raise taxes – possibly in the Autumn budget.
This is far from certain, however, and it’s important to not assume that this is inevitable. After all, there are powerful political forces in the Conservative backbenches, grassroots and elsewhere which are likely to push back against this. Nonetheless, it might be wise to speak with your financial adviser about how to get the most out of your current tax situation and allowances, whilst laying some contingency plans to help ensure you can continue meeting your financial commitments and retain some manoeuvrability.
Initial hints & suggestions in May 2020
One possible area where taxes might raise concerns self-employed people. In March 2020, the Chancellor launched a scheme which covers 80% of a freelancer’s average earnings (over the last 36 months), up to £2,500 per month, if they cannot meet their financial commitments. At the same time, Rishi Sunak hinted that to help pay for this government spending, self-employed people might need to increase their National Insurance Contributions (NICs) in the future, so that they equally reflect those paid by employed people.
It’s worth noting that one of Sunak’s predecessors, Philip Hammond, attempted and failed to do this in 2018. The current Conservative government, however, enjoys a far larger parliamentary majority of 80 seats, whilst Prime Minister Boris Johnson currently enjoys great popularity across the country. Whilst this NIC rise is not guaranteed, the UK government appears to have the political capital to spend on making this choice if they so choose.
There is also speculation about pension tax relief; an area of great importance to our financial adviser’s clients here at Cedar House. Whilst it would not exactly be a “tax rise”, equalising tax relief between Higher Rate and Basic Rate taxpayers could bring in more Treasury revenue. Indeed, there was speculation in early 2020 that then-Chancellor, Sajid Javid, might lower pension tax relief for Higher Earners from 40% to 20%, saving the government £40bn a year. This idea was soon dropped, but the new circumstances we face with COVID-19 could bring it back on the radar later in 2020. Again, this is not a certainty and nor is it even likely at this point, but speak to your financial adviser if you are at all concerned.
One final area to keep an eye on with your financial adviser is inheritance ta (IHT). In the past, the UK has shown a willingness to raise IHT to help make up for lost revenue after a national crisis. After World War II, for instance, IHT was raised to 80% and even went as high as 85% in 1969. Currently, in 2020-21 it stands at 40%, but there were rumours of IHT reform earlier in 2020 which never made their way into the March budget. With IHT receipts already down £2.2bn compared to the previous year, proposals for reform could start emerging later in the year to help fund economic recovery. Again, keep an eye on this with your financial adviser and discuss your options if you are at worried about how your estate plan might be affected.
If you would like to discuss your financial plan or retirement strategy with a member of our team, then get in touch today to arrange a free consultation:
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