Chris Romans | Chair of the FBUK | Tax Committee
It wasn’t long after the Chancellor had delivered last year’s Budget that speculation began about the
possibility of further tax rises this autumn.
The so-called “£22bn black hole” identified by the Government at the start of its term, was followed by significant tax and National Insurance increases being announced at its first Budget. These included a 1.2 percentage point increase in employer National Insurance contributions (NICs), VAT on private school fees, and a 50% restriction in inheritance tax (IHT) business relief and agricultural property relief (BR/APR).
This year, a predicted shortfall in the UK’s public finances could be largely driven by a combination of slow economic growth, global trade disruption, and a commitment to increasing defence spending.
All of this means that, if the Government is to meet its selfimposed fiscal rules without meaningful cuts to public spending, taxes may have to rise. The questions are: which ones and by how much?
Around two-thirds of the Government’s current tax revenue comes from the “Big Three”: income tax, NICs and VAT. In 2023–24, these generated around £650bn worth of revenue. A percentage point increase in any one of them could raise between £8bn and £10bn per year. However, this would require the Government to break a key election promise to avoid tax increases for “working people”.
If the Chancellor sticks to this pledge, the options left might be characterised as “tinkering around the edges”, albeit some may still have significant effect. At the time of writing, the below measures are receiving most speculation.
Reducing the dividend tax-free allowance: a reduction or removal of the £500 tax-free dividend allowance. This would raise around £70m per £100 reduction and lead to additional compliance requirements for those previously just within the allowance.
Increasing the dividend tax rate: raising the existing rate (39.35%) for additional rate taxpayers to 45% applicable to other income. Those opposing this increase may argue that cash paid in dividends has already been taxed to corporation tax at up to 25%, leading to an overall effective tax rate of 58.75%.
Reduced relief on pension contributions: either by charging employer NICs on contributions to an employee’s pension or restricting tax relief to a maximum rate rather than marginal rates. This could be very complex to implement for public sector defined benefit schemes and is likely to have a significant impact on them.
Freezing income tax allowances: already frozen until 2028, these could be frozen until 2030 with no immediate cash impact on the electorate. It would also arguably keep the Government aligned with its manifesto pledge, but would be at odds with the Chancellor’s 2024 Budget speech, where she concluded that extending the threshold freeze would hurt working people.
Introducing a wealth tax: much has been written about wealth taxes and the potential that a 1% or 2% tax on assets over £10m could raise as much as £24bn per year. There have been concerns raised that the assumptions in these figures are potentially unrealistic, especially considering the risk that such a tax could hasten an exit of talent and wealth creators from the UK. Increasing the CGT rate: aligning CGT with income tax would almost certainly reduce revenues (at least in the first instance) as CGT operates on a “Laffer curve”. Increasing the rate to 45% would mean people looking to limit CGT arising, most straightforwardly by simply not disposing of assets, but also by taking steps such as leaving the UK before making a disposal or owning assets through companies. All these options potentially lead to a counterintuitive fall in tax revenue. However, the Government may take the view= that a small increase, say to potentially 28%, may be a minor enough adjustment for most taxpayers to maintain their typical behaviour.
Further IHT reform: extending the scope of IHT by removing the exemption for gifts from income, increasing the qualification period for business relief from two years or increasing the exempt gifting rule from seven years. Ultimately, funding future UK spending commitments, including the pension triple lock, public sector pensions and the promised increase in defence spending, would seem to require a lift
in tax revenue unless the Chancellor sanctions further borrowing. If this is not to come from income tax or NICs, an alternative is to expand the scope of VAT.
Currently, the UK charges the full rate of VAT on less than half of goods and services and has one of the narrowest VAT bases in the world.
A key issue with expanding the scope of VAT is that it’s a regressive tax whereby those on lower incomes are impacted the most by any increase. This could be politically challenging and could also be inflationary in the short-term.
It’s clear that there is no easy solution here. The Government continues to make growth its number one priority and this should raise revenue over time, but it won’t happen overnight. The Autumn Budget may well include adjustments to existing measures in order to stimulate that growth.
For businesses, a commitment to full expensing of certain capital expenditure and to “generous” Research and Development (R&D)mtax credits are certainly welcome, but there are a number of barriers
to growth that the Chancellor could consider reviewing:
1) BR/APR: it is clear that concerns over a potential 20% future inheritance tax liability will restrict investment. FBUK’s survey has demonstrated the negative impact of this policy change, potentially reducing investment at affected businesses by an average of 16% and employment by 9%, together reducing GVA by £14.8bn and reducing government tax receipts by £1.9bn by the end of this Parliament.
2) Income cliff edges: for higher rate taxpayers, moving from a salary of £100,000 to £125,000
increases their effective tax rate from 42% to 62% (45% to 67.5% for Scottish taxpayers), due to the gradual reduction in the personal allowance between these amounts. Similar issues occur with the loss of Child Benefit and free nursery places in England.
Effective tax rates of over 100% have been evidenced.
3) VAT threshold: similarly, small businesses that supply to individuals, or VAT-exempt businesses, are not incentivised to grow their revenue above the VAT threshold of £90,000 as going above this means they effectively need to increase prices for their customers by 20%.
Bringing this all back to family businesses, FBUK continues to lobby on fiscal policy on behalf of the family businesses it supports. With no surprise, the number one issue is presently IHT business relief, and FBUK still hopes the Government will consult on the proposed changes as the draft legislation is progressed, and further consider the negative impact they could have.
