With a week to go until Chancellor Rishi Sunak’s March Budget, there has been growing speculation over whether he will unveil a raft of tax changes to help balance the books in the wake of the Covid-19 pandemic.
Having already been forced to cancel his Autumn Budget because of the ongoing economic upheaval, the Chancellor may look to use the upcoming Budget to unveil his ‘build back better’ plans for economic recovery.
Steven Cameron, pensions director, Aegon, says: “The chancellor faces the daunting task of how to begin recouping the many billions he has been spending for almost a year offering much needed support to individuals and businesses through the pandemic.
“With the UK government only now beginning to set out its roadmap out of lockdown, and the full economic impact still unclear, the chancellor may feel it’s still too early to shift his focus from tackling the virus and protecting jobs. But having cancelled his autumn Budget, and with the funding gap getting bigger by the day, he will be keen to start making some announcements on future remedies whether through increases in taxation, a growth agenda or most likely a combination of both.”
It has recently been reported that the Chancellor will remain committed to the Conservative manifesto pledge of a ‘tax triple lock’, meaning no increases to rates of income tax, national insurance or VAT.
Cameron says: “While a blanket increase to the headline rate of income tax or national insurance would go against the manifesto, the Chancellor might consider other more targeted changes such as levying national insurance on earned income after state pension age. There’s also the potential that personal thresholds will be frozen meaning individuals won’t benefit from the usual tax ‘savings’ by paying tax on less income.”
According to Cameron, the tax triple lock also raises the prospect of increases to other taxes or cuts in allowances and reliefs. High on the list of possible targets are pensions tax relief and wealth taxes as well as corporation tax.
Cuts to pension tax relief or contributions has been touted as a possibility for years, particularly for higher and additional rate taxpayers. The latest suggestion is that the Chancellor will look to move to a flat rate of relief at 25%. While this would reduce the incentives for higher rate taxpayers, it would improve what basic rate taxpayers receive.
Cameron explains: “Any changes here are highly complex to implement, particularly for defined benefit schemes. This means individuals and pension schemes would need sufficient time to adapt. It’s vital any changes to tax reliefs and incentives don’t discourage saving for retirement – if anything, people should be given extra incentives to invest to support economic growth.”
The Government is also keen to encourage pension funds to invest more in ways that support economic recovery, including infrastructure, start-ups and the green revolution. Opposition leader Keir Starmer recently proposed a new British recovery bond and if Rishi Sunak follows suit, investors may be given further targeted incentives to invest in certain areas to support the recovery of the UK economy.
Meanwhile, Cameron said capital gains tax could fall under the Chancellor’s axe as it currently sits outside of the ‘tax triple lock’ and considered something of a ‘wealth tax.’
However, he warns that any changes to increase CGT rates or decrease the annual exemption would affect a wide variety of individuals, including owners of second properties who choose to sell.
There has also been debate on the future of the state pension triple lock, which currently grants annual increases at the highest of price inflation, earnings growth or 2.5% each year. The Government has already confirmed that the triple lock will be granted again this April but with earnings growth likely to be highly volatile for the foreseeable future, this could prove too costly in future years.
Finally, the Chancellor is likely to use his Budget to address the highly contentious issue of social care, with the impact of the pandemic highlighting the strain the care system is under.
Cameron adds: “We may see additional funds allocated to the care sector in the Budget but this is unlikely to be more than a short term sticking plaster. Previous suggestions to create sustainable funding included an increase in income tax or national insurance, earmarked for social care, and perhaps just for the over 40s. How this sits against other tax plans remains to be seen.”
