Pre-budget statements made by the new Chancellor and Prime Minister have already damaged the UK economy. Will the budget make things worse?
In the three months or so since Labour came to power they have repeatedly mentioned a supposed £22bn blackhole in the economy. However, many voters are sceptical of this and are fearful that it is simply a way to blame any radical tax increases on the previous government and to hold themselves blameless for massive policy shifts. How real are these threats to individuals and UK SMEs in particular, and will any new policies cause damage to the economy rather than just increase tax revenue?
Since Labour re-took control of the government in July, one message more than any other has been mentioned repeatedly; that is that there is a £22bn black hole in the economy and this requires radical thinking.
Before the election, all major parties stated that they would not increase the direct levels of income tax, employee national insurance, or VAT. It is widely expected though that capital gains tax, inheritance tax, pension tax relief, and tax treatment of non-domiciled residents will be targeted, and hit hard. This message being underlined by a speech at the Labour Party conference from Sir Kier Starmer stating that ‘those with the broadest shoulders must take most of the burden’.
But history has taught us time and time again that higher tax rates often lead to a lower overall tax take, as the wealthiest find ways around the increases. This leads to the ‘squeezed middle’ and SMEs being hit the hardest ,and with no benefit to the economy as a whole.
Capital Gains Tax
It is widely predicted that the standard rates of CGT of 10% for lower rate taxpayers and 20% for higher rate taxpayers will be brought into line with income tax rates, ie 20%, 40%, and 45% respectively. As such, the tax rate will double at the very least. There is definite panic in the markets as the number of buy-to-let and other second homes, as well as many other assets, are being sold before the end of October. Funds withdrawn from investments platforms have also increased rapidly. This will crystalise any capital gains at current levels but will further reduce the supply of rental homes and investments in the UK economy. A high level of CGT undermines investment and particularly those building their own businesses.
Inheritance Tax
For some reason inheritance tax is still seen by many as the preserve of the ‘rich’. But after many years of frozen allowances and increasing house prices it is all too easy to pay IHT if you are a property owner living in the south of England. It is expected that many loopholes will be closed, and thresholds reduced or, at the very least, frozen for much longer. Increasing this tax hits those families that save hard throughout their lifetimes and taxes monies that have already been taxed twice before as income and as savings. Many countries, including Portugal, Singapore, and Australia simply do not have IHT.
Pension Tax Relief
At present, tax relief is given at the level of income tax paid. This is done to incentivise people to save for their retirement rather than being dependent on the state in later years. It is expected that tax relief will be reduced to a flat 20%, or perhaps a standard 33% as previously mentioned by the Chancellor. Alternatively, it may be that employers will be asked to pay employers NI contribution on payments into pensions, but this will effectively be another tax on businesses and will hit SMEs disproportionally hard. A possible alternative being proposed is to remove the tax shelter of pension funds and so including them in the estate on death. This would effectively be a retrospective tax over the lifetime of an individual and their pension contributions.
Non-Dom Tax
In 2022 Warwick University published a report stating that removing the non-dom tax regime could generate £3.2bn in extra tax receipts. It assumed that only very few high-net-worth individuals would leave the country. However, according to a recently published report by Henley & Partners Wealth Management it is now forecast that some 9,500 HNW will leave the UK this year alone, and that is even before any changes are implemented. Proposed changes not only mean that they would be taxed on all their income worldwide but also that the 40% inheritance tax would also apply – and remember, many countries simply do not have inheritance tax. It would be very easy to see how these changes would actually lead to a loss of tax revenue rather than an increase.
Every government needs to tax the population in order to provide public services but when these taxes are too high it stifles inward investment, creativity, production, and employment. Labour’s pre-budget words are already doing this, so let us all hope that the bark is worse than the bite.
On 6th October, The Sunday Times published the results of research undertaken by the Treasury. By HMRC’s own estimates, each 1% increase in CGT would raise only £100m each year. More crucially, a 10% increase would actually cut total tax take by £2bn by 2027-28 as it reduces investment and encourages investors to move overseas or alter behaviour in other ways to avoid the tax.
