Any increase in tax is going to have to wait for at least another four months, as UK chancellor of the exchequer Rishi Sunak presented the government’s spending review without a single hint about how it will foot the covid-19 bill, which currently stands at £280bn ($372bn, €313bn).
Unsurprisingly, this has left the financial advice sector in limbo, which must continue ‘as normal’ until the spring 2021 budget, where virtually everyone expects quite big changes to the taxation system.
The unaddressed rumours have only left scope for even greater speculation of what HM Treasury and the government will set out in six months’ time and which taxes and allowances will be the prime targets.
The vast majority of the industry believes that the review of capital gains tax (CGT) ordered by Sunak this summer is a clear sign that CGT will most likely be the one to increase.
Julia Rosenbloom, tax partner at Smith & Williamson, said capital gains could go up to 45%, in line with income tax rates.
No escape from tax hikes
Rachael Griffin, tax and financial planning expert at Quilter, said that while we now know how big the “fiscal hole is likely to be”, industry is still “in the dark” on how it will be filled and what fiscal policy will be taken.
This is now the second time the chancellor pushed back setting out plans, following the cancellation of the autumn budget.
“Despite his popularity, Rishi Sunak will need all the political capital he can get. Flashy graphics with a personal signature won’t look quite so good when announcing tax hikes,” she added.
“Sunak will try his hardest to keep the Tories’ manifesto commitment to not raise income tax, VAT or national insurance. And having legislated to increase the state pension in line with the triple lock next year, Sunak has limited options at his disposal to increase the tax take.
“What we do know is that bringing the nation’s finances on a sustainable footing inevitably means that some tax breaks will become less generous, and certain taxes will be hiked. Enjoy the tax breaks while you can, as this could be the last year they can be enjoyed.”
Griffin believes that, after taking out manifesto commitments and promises, what’s left on the table is an increase in CGT, a cut to tax reliefs, the implementation of a wealth tax, and/or a rise in inheritance tax by scrapping the residence nil-rate band.
Jessica Jamieson, partner at law firm Cripps Pemberton Greenish, added: “Whilst the spending review was never intended to give any detail on changes to tax rates, and did not do so, it is clear that such a gloomy forecast has laid the ground for tax rises in the future.”
Good news for pensions
But David Gibb, financial planner at Quilter, added that the chancellor’s decision not to switch away from the retail price index (RPI) as a method for calculating inflation until 2030 is good news for pensioners.
He said: “Many defined benefit (DB) pension schemes pay an income that is linked to RPI. As pension schemes are, by definition, a long-term product, just a small tweak in the methodology for increasing payments can have a huge impact on the value of the pension.
“For now, this has been kicked down the road and that should help give people time to plan appropriately. For those wishing to transfer to a defined contribution scheme, transfer values may fall in future as these are tied to the value of gilts.
“Annuities also have payments linked to RPI and future annuity prices may not be lower to reflect the lower level of expected future benefits.
“For those confused about the impact and what it means for their retirement plans, it’s critical to speak to a financial planner or their scheme so they can understand what action they may need to take.
“There is no disagreement about the need to ditch RPI as a measure of inflation. It has a number of statistical shortcomings in how it is calculated; which means that it has, at times, overestimated or underestimated the true level of inflation.
“Moving to consumer prices index including owner occupiers’ housing costs (CPIH), which tends to be around 0.8% lower than RPI, will therefore mean that contracts tied to RPI won’t increase by as much as before.”
