Tax rises are occupying minds to pay down the pandemic, meet climate targets, and politically break ground on much-vaunted levelling up promises. Private client and tax specialists share their views on what to expect from this week's Autumn budget.

UK Chancellor of the Exchequer - aka finance minister - Rishi Sunak delivers his annual budget statement on Wednesday this week. Sunak has to reconcile how to encourage economic growth after the COVID-19 crisis, pay for various promises towards the National Health Service, regional development and infrastructure, all the while observing financial discipline and preventing the UK being scorned by global holders of UK debt. The current Conservative administration rules at a time when, according to various measures, the UK's tax burden is at its heaviest since the late 1960s. Such a position shows how far in some ways the government has departed from the broadly free market, limited government agenda of previous administrations, particularly the Thatcher one. Internationally, the UK has signed up to the G20 agreement - pushed by US president Joe Biden - for a global minimum corporate tax rate of 15 per cent. 

Already, the government has moved to increase National Insurance Contributions (NICs) on employees and businesses, has pledged to push corporation tax to 25 per cent from 19 per cent, and has frozen the pension lifetime allowance at £1,073,100 – until April 2026. Income tax thresholds will not be increased - which means some taxpayers will be dragged into higher-tax brackets. The costs of paying to furlough millions of workers, and deal with the ravages of COVID-19, are high. Critics have argued that raising tax rates will paradoxically reduce and not raise revenues because of the impact on hiring and incentives more broadly. (That remains a matter of debate - the "supply-side" argument, as discussed here.) And while not strictly a budget issue, Sunak is also acting when the UK government is pushing ahead with its plans to reduce carbon emissions and shift away from fossil fuels, potentially hitting households with higher energy and transition costs. 

Here are comments from across the sector. 

Simon Warne, partner, private clients at Crowe
With an end to furlough support, thoughts turn to post-pandemic life and how the country is going to pay the huge bill (perhaps £500 billion) run up in the name of protecting the economy.  At the Conservative party conference, Chancellor Rishi Sunak referred to putting the economy onto a sustainable footing without burdening future generations – perhaps a code for some sort of tax rise in the short term. It is politically difficult to go against manifesto promises but if there are to be tax rises which raise significant sums in macro terms they will have to be borne by the many and not just the few taxpayers ‘with the broadest shoulders’.

There are some 31.6 million income taxpayers and the taxes they contribute by way of income tax (£194 billion) and national insurance (£142 billion) comprise some 56 per cent of all tax receipts. Many of these taxpayers will have a distorted view of their contribution, most will be well aware of the basic-rate (20 per cent) but will be unaware of the large benefit afforded by the personal allowance or conversely just how much National Insurance they pay either directly or indirectly by their employers.

Tax is too complex and it is far too easy for innocent mistakes to go unnoticed for years resulting in large catch-up payments, and penalties of many thousands of pounds when they come to light. The imposition of the High Income Child Benefit charge (actually a clawback of a state benefit) is a particularly egregious example, which can catch out middle income families who by and large will be subject to Pay As You Earn (PAYE) and who will not be submitting annual tax returns.

It is surely time for some radical simplification where the false hypothecation of income tax and national insurance are swept away so that the many can understand the contributions they are being asked to make.
 
Rebecca Durrant – partner and national head of private clients at Crowe 
 I hope there is more incentivisation for business to invest into training, pay and working conditions across the UK so we can bridge the skills gap and get more people into well paid jobs where they feel valued. This would put more money in people’s pockets, increase spending power and boost the economy.

The increase to National Insurance Contribution (NIC) and dividend tax will bring in a good chunk of revenue to help fill the COVID-19 hole and the continued freeze on higher rate tax thresholds will bring more taxpayers within the higher tax band particularly where salary increases are kept in line with the higher rate of inflation. I would expect this tax creep to continue rather than a bolder move of increasing tax rates for additional rate taxpayers for example.

Changes to Capital Gains Tax have been on the horizon for a while but that in itself will not bring in much extra tax and is politically sensitive. An overhaul of the capital taxes system in its entirety to include Inheritance Tax is long overdue and could have a much bigger impact. A lot of work has already been done in this area in terms of consultations and review. It would be a brave move by a Conservative Chancellor to action this.
 
Nick Latimer, private clients partner at Crowe
It will be hard to levy significant new tax rises beyond the recently announced 1.25 per cent increase in the rates of national insurance and dividend tax.

Personal tax and other thresholds will continue to be frozen, which have a revenue raising effect as inflation increases.

One area of potential reform will be Capital Gains Tax rates, which had been expected to increase in previous budgets. I expect there to be a move to increase the rate to be more aligned with income tax rates, maintaining a differential for residential property.

Pensions tax relief remains a significant cost for the Treasury, and restricting higher rate relief regularly arises as a potential area for attack. However, I do not see this as being an area for significant reform at this time due to the political and technical challenges associated with further change.

There will be the usual series of measures to target tax avoidance, and this could include ‘simplification’ measures in the Inheritance Tax system to remove or restrict some of the tax benefits that are currently given to specific asset classes (for example certain AIM shares).

One area that I hope the government focuses on are measures to reduce the impact of climate change, and offering incentives for further investment in this area as prices for energy escalate. At this stage, I don’t expect there to be large increases in duties though these may be signalled for the future, but I would expect further tax incentives for businesses and individuals to make positive changes to help the environment, including enhanced allowances for energy saving investment, and reintroduction of new car scrappage schemes.

Big rise in inheritance tax receipts
 
Heather Owen, financial planning expert at Quilter
“Figures just released show inheritance tax receipts continue to be profitable for the Treasury. The government collected £3.1 billion in inheritance tax between April and September, £0.7 billion (22 per cent) more than for the same period a year earlier, albeit slightly less than last month’s increase.

“With the budget fast approaching, the rumour mill has begun and questions surrounding inheritance changes are beginning to form, with some suggesting, or perhaps hoping, it could be scrapped altogether.

“Families hit earlier in the year by the nil rate band and residence nil rate band freeze at existing levels until April 2026, at £325,000 and £175,000 respectively, will likely be hoping for reform. Despite the fact that this morning’s public sector borrowing figures give the Chancellor a little more wiggle room, reform remains unlikely. While inheritance tax raises relatively little in comparison to the Chancellor’s growing list of spending projects, a change of this magnitude is highly unlikely as the Treasury needs every penny it can get right now.”

Laura Tommis, trust manager at ZEDRA
"HM Revenue and Customs receipts for IHT for the period April 2021 to September 2021 showed an increase of over 22% in comparison with the same period last year. Whereas this is not surprising and is in keeping with the monthly data so far released for 2021, advisors and clients are encouraged to look out for opportunities for IHT planning whilst the stock market and UK property values continue to provide strong returns.

Whilst there has been some debate about measures the Government may wish to take in the autumn budget due to be released next week to increase tax receipts to aid further economic recovery, targeting IHT exemptions, such as Business Property Relief, seems to some an easy step to take. With all this in mind and with no increases anticipated to the NRB and RNRB which may remain at their current levels for some time to come, timely lifetime IHT planning as well as well as IHT efficient will drafting and even varying beneficiaries’ entitlement following a testator’s death can all be powerful tools when looking to address a future IHT liability due on an estate.”

Barclays, UK economics research
The fiscal situation

The OBR's [Office for Budget Responsibility’s] updated forecasts should show a lower deficit in 2020/21 and 2021/22 given that emergency policies have been less expensive, and the economic recovery faster, than expected. 

Beyond this, the borrowing profile is likely to include higher debt interest spending, but this may be offset by improved assumptions on the economic outlook, leaving the outlook for the public finances at first order little changed. Although various policy measures have been rumoured for the upcoming Budget, we do not believe that these will materially impact the public finances, with the Chancellor unlikely to meaningfully alter the contours of the already restrictive policy mix. 

The Spending Review will allocate money to governmental departments for the coming three-year period, giving the government an opportunity to provide clarity on how previously promised money for capital spending will translate into the twin objectives of levelling up and the net-zero transition.

Centre for Economics and Business Research
So far, the Chancellor has been raising taxes. He announced a manifesto-breaking 1.25 per cent increase in national insurance contributions a month ago. This was first touted as for funding social care and then to pay for the NHS. Who knows where the money will eventually go? Last March, the Chancellor also announced a record £65 billion in tax rises, mainly through freezing income tax brackets and raising corporation tax. The problem with some of these tax rises is that with the UK in the bottom half of the tax competitiveness league for OECD countries, the actual revenue raised could be much less if business and taxpayers simply move away to more favourable jurisdictions.

Yet the Chancellor appears to be plotting to raise more taxes. While he has already frozen the capital gains tax allowance until 2026, there are suggestions that he might raise the rate closer to income tax rates or cut the tax-free allowance. Higher inheritance taxes are also rumoured.

There might be some sectoral tax reliefs for business, especially the retail sector, though it is unclear whether these will do much to offset the impact of a 6 per cent rise in the National Living Wage from £8.91 an hour to £9.42 (for over 23-year-olds) and higher employers’ National Insurance.

Assuming that the announced rise in National Insurance that was meant to pay for better social care will in fact be diverted elsewhere, social care is still considered to be heavily underfunded). The government is likely to be under pressure to increase grants to struggling households following the termination of the pandemic rise in Universal Credit. Additionally, other sectors are currently ramping up the pressure for more public spending.

If the Chancellor were brave (an adjective that is not normally used as a compliment in Whitehall) there are some routes out of his fiscal dilemma.

He could reform taxes. Currently the UK tax system manages to raise much less revenue than it could while being highly discriminatory, unfair, and doing considerable damage to economic growth. Perhaps the most extreme of the badly structured taxes is the stamp duty on property transactions that gums up the housing market and prevents old people from downsizing. Cebr studies have consistently shown that a lower rate of stamp duty would raise more revenue. There are many other taxes, like the sharp rise in the marginal rate of income tax to nearly two thirds when tax allowances are phased out, that almost certainly lose more revenue than they gain.

Second, he could reform public spending. To take just two examples, comparative studies such as the Armitt report have shown that HS2 [a high speed rail project linking London to the Midlands] will cost substantially more than any previous high speed rail system – about 6 times the French system for example. While the Public Accounts Committee has pointed out that the UK Track and Trace system has cost £37 billion, some estimates of the cost of the equivalent German system are as low as £48 million, just 0.14 per cent of the UK cost. Even the government’s new body to investigate the causes of the UK’s low productivity is planned to cost over £30 million, about 10 times what it should. Public waste and inefficiency is not only damaging the economy but it leads to inequality as the funds that could be redistributed are frittered away into a spending black hole.