With a massive tax hike already slated for spring next year, it’s unlikely Rishi Sunak’s budget will have a nasty surprise in ten days’ time.
But don’t rule out further tax hikes as the Chancellor attempts to repair the government’s finances, which have been hit by the pandemic and lockdown.
While government departmental budgets are more likely to cut spending – a point made last week by the influential Institute for Financial Studies (IFS), which suggested they could total £2bn – the finances of households have been sunk. Even more can be squeezed.
On top of a 1.25 percent increase in national insurance contribution rates and higher taxes on dividend income, the big council tax bill looks very much on the cards — perhaps five percent more than next April.
Money-Spinners: One tax that is ripe for reform, but unlikely to be touched upon by Rishi Sunak, is the inheritance tax. The tax earned the Treasury £2.7 billion between April and August
Taxes on alcohol may also rise, while graduates may have to start paying off their student loans earlier — if lowering the income threshold at which repayment begins.
Other taxes could be raised as well, though the craze could backfire from the anger of people already dealing with high energy bills and fears of a tickle in inflation.
The tax relief on pension tax contributions may strike while the tax on capital gains (usually done on share settlement) may rise in line with those levied on income.
Jason Hollands, director of wealth manager Tilney, believes it would be ‘politically risky’ for Sunak to announce a more comprehensive tax hike.
Like the IFS, he feels the underlying theme of Sunak’s budget will be ‘spending restraint to make room for pre-election tax cuts in 2024’.
One tax that is ripe for reform, but unlikely to be touched by the fad, is the inheritance tax. The combination of rising home and property prices has made the inheritance tax a rich source of revenue for the Treasury.
The latest data shows £2.7 billion in inheritance tax receipts between April and August, an increase of £0.7 billion – 35 percent – from the same period last year.
Currently, when someone dies, the first £325,000 of their estate – estate, shares and cash minus debt – is exempt from inheritance tax. Any amount above this zero-rate band is typically taxed at 40 percent.
For married couples and civil partners, the rules also provide exemptions to the spouse or civil partner. This means that after the death of a partner, the survivor can claim any of their unused zero-rate bands.
On top of that, a £175,000 residence zero-rate band is available when a home is given to a child or grandchild – including stepchildren, adopted children and foster children.
Earlier this year, Sunak said that these zero-rate bands would remain frozen until 2026. Until then, the £325,000 exemption will remain constant for 17 years.
‘Outrageous’, says Hollands. ‘Since the £325,000 limit was introduced, global share prices have risen by over 400 per cent and retail prices have risen by over 30 per cent. Taking inflation into account, it should be £100,000 more than this.’
James Ward, a money specialist at the law firm Kingsley Naples, says IHT bills vary widely on a regional basis, with the highest amounts paid in London and Home counties (see table). Stratford-upon-Avon, Winchester, Devon and Dorset are also ‘hotspots’.
Ward describes the inheritance tax as a voluntary tax – because it can be avoided through careful financial planning.
‘The beneficiaries are the ones who pay the tax,’ he says, so the incentive isn’t always high for someone to reduce the tax before their own demise. But I would urge anyone in their late 50s or early 60s to think about an IHT plan.’
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