It now seems inevitable that Rishi Sunak’s forthcoming Budget will be more painful on our pockets than we ever thought possible in the wake of the Conservative party’s thumping Election victory late last year. Forget promised tax cuts and start thinking rises.
Although the date for the Budget has yet to be announced – it could be next month or even November – it is blindingly obvious that tax hikes are heading our way.
When they come, some could impact our wallets immediately – for example, any rise in fuel duty – while others are likely to be delayed until the start of the new tax year next April. Regardless, it will mean a financial ‘ouch’ all round with middle-income households probably bearing the brunt of the pain.
Rishi Sunak said that taxes would have to be increased to pay for the Government’s multi-billion pound support of the economy throughout the pandemic and lockdown
Tax rises that will feel more Labour than Conservative.
Dishi Rishi, still basking in the glory of the success of Eat Out to Help Out, said as much last week when he told the new influx of Tory MPs elected last December that taxes would have to be increased to pay for the Government’s multi-billion pound support of the economy throughout the pandemic and lockdown.
While Sunak said there would be no ‘horror show of tax rises with no end in sight’, he confirmed that ‘difficult things’ would need to be done while ‘treating the British people with respect, being honest with them about the challenges we face and showing them how we plan to correct our public finances’.
As is always the way with a Budget on the horizon, rumours of the specific tax hikes being considered are rife. This is a deliberate ploy by officials at the Treasury, designed to ‘test’ the public’s reaction to the ideas.
A hostile reception will normally result in the proposal being dropped – as was the case in early 2016 when the then Chancellor George Osborne pulled back from a radical overhaul of the tax relief given on pension contributions.
A quieter response, though, will mean the idea remaining on the table. Already, cuts in tax relief on pension contributions are being mentioned as one way of Sunak restoring a semblance of order to public finances.
There are also suggestions that capital gains tax rates could be increased so they are aligned with income tax rates – the Chancellor has already ordered a review into this.
Meanwhile, the self-employed could face higher National Insurance bills while the triple lock guarantee – that increases the State Pension every year by the higher of inflation, average earnings or a minimum of 2.5 per cent – could be suspended.
An increase in fuel duty and higher corporation tax rates are other measures on the agenda.
None of these proposals are likely to be as effective in raising tax revenues – or reducing public expenditure – as Treasury officials may think. There will be unintended consequences.
For example, any further tinkering of tax relief on pension contributions is likely to make an already complex tax regime impossible for most savers to get their brains around.
It will disincentivise households from building long-term wealth so that they do not become a burden on the State in later life. Hardly a trend a Tory Government should want to encourage.
Similarly, on capital gains tax, the introduction of higher rates would simply discourage investors from crystallising any gains on investments – those held outside a pension or Isa – made above their annual tax-free allowance that is currently set at £12,300.
They will hang on to investments for longer. As a result, the tax take may not be as bountiful as the Treasury’s forecasters predict.
Irrespective of what tax hikes are coming our way, readers should look to tuck away any spare cash into tax-friendly savings vehicles in the coming weeks – Isas and pensions especially.
They should also consider utilising their annual capital gains allowance by taking profits on any successful investments – particularly those that have soared in value on the back of the boom in technology-related companies.
Difficult times lie ahead for us all – the unemployed, the employed and the retired. An inescapable truth.