AAB: Get preparations in place for Budget tax rate hikes

An increase in tax rates to offset economic support during the pandemic is a real possibility that everyone should prepare for, writes Jill Walker.

There is a risk of increases in tax rates to fund the economic support provided during the pandemic.

Before the scheduled autumn 2020 UK Budget, advisers and taxpayers alike were bracing themselves for a hike in the rate of capital gains tax as well as the very real possibility that some reliefs, such as Business Asset Disposal Relief, known previously as Entrepreneurs’ Relief, might be withdrawn altogether.

When the Budget was pushed back to spring 2021 there was an audible sigh of relief – but with a number of recent Budgets containing surprise announcements, it is important to consider any possible changes ahead of Budget Day on 3 March.

Against the backdrop of Covid-19, there is a very real risk that there will be an increase in tax rates to fund the economic support provided by the Treasury during the pandemic.

Jill Walker is a private client director at Anderson Anderson & Brown

More uncertainty is not what the economy needs at the moment, and it was hoped that any sweeping changes would be consulted on to allow taxpayers the opportunity to plan if required.

As Budget Day edges closer with no hint of what is to come, taking action to utilise reliefs and rates as they are now may well be beneficial.

So, what are the possible changes?

- Capital gains tax (CGT) rates are historically low at the moment, ranging from 10 per cent for basic rate taxpayers up to 28 per cent for higher rate taxpayers on the sale of residential property. There are also generous reliefs available, including Business Asset Disposal Relief (BADR), which can reduce the rate of tax from 20 per cent to 10 per cent on up to £1 million of gains.

The Office of Tax Simplification (OTS) recently set out recommended changes to CGT. As well as an increase to the rates to align with income tax rates, the OTS proposed: withdrawing BADR and replacing it with a relief focused on retirement; abolishing Investors’ Relief; removing the uplift in value of assets on death with the recipient instead acquiring the asset at the original base cost of the deceased; reducing the annual CGT exempt amount (currently £12,300) and replacing it with a relief for inflationary gains, and taxing retained earnings in companies at dividend rates rather than CGT on the sale of the shares or when the company is liquidated.

- Income Tax and National Insurance Contributions (NIC) rates are not expected to increase – the Scottish Government has confirmed that Scottish rates will remain the same, with a slight change in the starter and basic rate thresholds.

But pension reliefs, which have already been heavily restricted in the past few years, could be reduced further, in particular for higher earners. And self-employed individuals may need to brace themselves for an increase to NICs.

The Chancellor has already hinted that the self-employed should pay the same level of contributions as those who are employed. Currently the main rate of NIC for the self-employed is 9 per cent against 12 per cent for employees. Historically the self-employed have reduced entitlement to some benefits.

- The corporation tax rate is at an all-time low of 19 per cent and it is estimated for each percentage point increase in the rate, around £3.4 billion would be raised. With average rates across the G20 nations being 27 per cent, the rate could increase and still leave the UK in a highly competitive position.

- Stamp Duty Land Tax (SDLT) is another candidate for possible changes, with the current holiday scheduled to end on 31 March. The Scottish Government has already confirmed that the equivalent Land and Buildings Transaction Tax (LBTT) holiday in Scotland will end on the same date.

- The Wealth Tax Commission published its report in December and although not entirely in favour of the introduction of a Wealth Tax, acknowledged that it could raise as much as £260bn. This could be achieved by levying a charge of 1 per cent for five years on individuals with wealth exceeding £500,000.

Given this would be a first in the UK, and the Chancellor has previously publicly dismissed the introduction of such a tax, this option might be less likely to feature in the Budget Day announcements.

Jill Walker is a private client director at Anderson Anderson & Brown