With a substantial corporation tax rise and an increase to NICs and dividend rates already baked into the plan, and many of the major spending decisions made public in the run up to one of the leakiest Budgets in memory (and much to the Speaker’s annoyance), expectations as to any further substantial tax changes in today’s Budget were very low and the Chancellor certainly did not disappoint. What was presented today was a broadly crowd-pleasing Budget focussing on investment, duty cuts and welfare reform for society’s least well-off.
Duty announcements in particular will no doubt be very welcome and many in the industry will be raising a glass (of sparkling wine) to Mr Sunak tonight. The planned rise in fuel duty has been cancelled and the alcohol duty regime is set to be simplified, leading to a reduction in the tax on certain drinks. Air passenger duty on domestic flights is also set to drop, in an effort to provide a boost to regional airports., though perhaps not to the government’s climate credentials in advance of COP26. A 50% discount on rates for retail and hospitality businesses and a cut to the rate at which universal credit tapers off were also announced, together with the widely trailed increase in the national minimum wage.
The limited attention given to tax in this year’s budget was very much shown by one of the ‘highlights’ of the tax changes announced, at least as far as the government was concerned. So as to promote the advantages of Brexit and as a nod to his backbenchers, the Chancellor was very pleased to announce a series of measures to reform the tonnage tax regime with the hope that more ships will fly the red ensign, a move described as being ‘entirely fitting for a country with such a proud maritime history as ours’.
As mentioned above, the big-ticket tax increases had already been announced earlier in the year. From April 2022, National Insurance Contributions (NICs) and dividend rates will increase by 1.25% in order to fund the NHS and social care. The NICs rate increase will be separated out in the following tax year into a stand-alone ‘health and social care levy’. Perhaps more dramatically, the corporation tax rate is set to rise from 19% to 25% from April 2023 (although the lower 19% rate will apply for companies which generate modest profits).
We now know that the Residential Property Developer Tax, introduced to deal with unsafe cladding and support confidence in the housing market, will be set at 4% on profits exceeding £25 million from April 2022.
It would also not be a Budget without at least one anti-tax avoidance announcement, and again the Chancellor delivered, with the Finance Bill set to contain further measures to clamp down on all promoters of tax avoidance schemes.
It was in part these rises in taxation which led the Chancellor to remark in his speech that the tax burden is now the highest it has been since the 1950s, professing at the same time his goal of reducing that burden towards the end of the Parliament. The stage is certainly set for vote-winning tax cuts in advance of the next election.
What hasn’t changed?
Even taking into account the substantial tax increases that had been announced before this Budget, many had expected to see a hike in our historically low capital gains tax (CGT) rates to bring them in line with income tax rates. The only change to CGT was increasing the window in which CGT has to be paid on residential property sales from 30 to 60 days: CGT rates made it through another Budget unscathed (though it would be interesting to see how many gains were realised in the run up to today, just in case). With an ambitious Chancellor seeing the clock running down until the 2024 election, this was probably his last chance to hike rates before dropping them in a pre-election giveaway. In light of this, we do not expect to see material tax increases to CGT before the end of this Parliament. Neither do we expect to see this government make changes to the inheritance tax rates or reliefs.
The taxation of self-employed workers, an issue which surfaced in the midst of the period of national furlough, was also left untouched, and no changes were announced for those claiming the remittance basis of taxation.
Pensions were also left as they were, again assuaging the fears of those who thought that tax relief might be limited to the basic rate only.
With all these headline-grabbing duty cuts and reforms, major spending pledges and a commitment to lower public sector borrowing, one might be left wondering where all the money will come from. In order to meet these commitments, the Chancellor appears to be counting a lot on the UK’s economic growth. The Office of Budget Responsibility now expects the UK economy to grow by 6.5% in 2021, up significantly from the 4% forecast at the March Budget. Moreover, it estimates that the ‘scarring’ effect of Covid on GDP will be only 2%, down from the 3% previously forecast.
Taxation by stealth – the impact of fiscal drag
It is worth remembering that headline rates of taxation are not the only means by which the Chancellor can increase his revenue in real terms. With the CGT annual exemption frozen from April 2022 until April 2026 and no increase in the highest income tax band since 2010, the backdrop of soaring inflation will lead to more income and gains falling into higher tax brackets. The Chancellor himself noted that inflation next year is expected to run at 4%.
Likewise, the inheritance tax nil rate band of £325,000 remains frozen until 2026 (in fact it has not increased since 2009), with the same going for the additional £175,000 residence nil rate band (which is available to those leaving residential property to their children and grandchildren). As a result, an increasing number of estates will cross the threshold into 40% inheritance tax. The effect of this will be exacerbated by the outsized increase in house prices seen this year in many areas.
In addition to this, it was also announced in the March Budget that the income tax personal allowance, certain classes of NICs and the pension lifetime allowance (among others) would all also be frozen from 2022, pushing more money out of the protection of the various exemptions and into taxable bands (or, in the case of the pension lifetime allowance, pushing savers into less tax efficient or riskier investments).
Is there anything you should do now?
From a personal taxation point of view, the Budget held very little of interest for those in the higher income brackets. Investors can continue to enjoy low rates of capital gains tax (albeit while the value of the annual exemption is eroded) and there were no hints of any future changes to the inheritance tax regime in spite of the many policy papers pumped out on the subject.
For those concerned about raids on investments or wealth more generally, this Budget will come as something of a relief, and gives breathing room to plan. Whilst it is not possible to predict the future, it would seem as if it is unlikely that there will be any substantial changes to taxation for the rest of this Parliament.
We help clients manage their affairs in order to achieve their tax and succession objectives whatever the prevailing headwinds and political agenda may be. Please do not hesitate to get in touch.