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    Tag: Chancellor

    Growth, credibility and survival: what’s really at stake in November’s Budget

    Posted on by Rebecca Campbell

    The run-up to any Budget inevitably brings with it a flurry of speculation and selective leaks. Often these are nothing more than flag-flying exercises so policy ideas can be floated to test the reaction of the press and public before any real decision has been taken. It seems this year is no different. What matters, however, is separating the noise from the reality: what the Chancellor can do, what she might do, and what she should do.

    Income tax remains the government’s single largest source of revenue, accounting for around 27% of receipts and 11% of national income. It is the most obvious lever for any Chancellor looking to raise funds. But the Labour Party’s manifesto pledged not to increase taxes on working people and that commitment already looks fragile. The rise in employers’ National Insurance contributions earlier this year was framed as something different, but it represented a broken promise by stealth.

    There have also been rumours of National Insurance being extended to rental income – a puzzling idea given that NIC has historically been a tax on earnings rather than investment returns. A more coherent approach might be to recognise that the tax system already differentiates between earned and unearned income. Not long ago, the basic rate was 22% on earnings and 20% on investment income. The Chancellor could revisit this structure and perhaps nudge earnings up to 21% while raising the rate on interest and rental income to 24%. Such a move would raise revenue while leaning on those with greater investment wealth, rather than purely on earned income.

    Another near certainty is the continued use of fiscal drag. By freezing thresholds in the face of inflation, the Treasury allows more taxpayers to be pulled into higher bands without the political fallout of an explicit rise in rates. But there is a real problem with the personal allowance. Left unchanged for so long, it risks dragging pensioners with only the state pension into the tax net. That would be politically toxic. I believe the Chancellor should use this Budget to raise the allowance, even modestly, to protect those on the lowest incomes.

    Inheritance Tax is always politically sensitive, but changes in the last Budget have already prompted greater use of gifting. Possible next steps include extending the seven-year survival period or introducing a US-style cap on lifetime gifts exempt from IHT. Either would be radical and controversial, so the government has to weigh the revenue benefit against the risk of alienating middle-income households who increasingly view IHT not as a tax on the wealthy, but as one on families who have worked and saved throughout their lives.

    Pensions remain a constant target for reform, and I can see three possibilities: 1) restricting or reshaping the tax-free lump sum. This would be politically explosive, given that many have planned their retirements and even final mortgage payments around this entitlement. 2) Introducing a flat rate of relief on contributions. This would simplify the system and redistribute relief away from higher earners, although at the cost of dampening incentives to save. 3) levying employers’ NIC on pension contributions. That would raise revenue, but at the expense of both businesses and employees, who ultimately share the burden. None of these options are straightforward, and each risk undermining long-term confidence in retirement saving.

    When Labour came into power, they spoke endlessly of a £22bn black hole. That narrative dominated to such an extent that it risked talking the UK economy into recession. This time around, the government has been quieter. That feels like a deliberate choice by a relatively unpopular administration which is trying to dampen expectations, avoid fuelling pessimism, and buy time. But the Chancellor cannot rely solely on delay. Her policies will only succeed if the economy grows. Growth, in turn, requires confidence and not constant tinkering. It also requires investment from both the private sector and individuals.

    When you combine all of these factors, this Budget must offer something beyond tax rises and fiscal drag. Reliefs for businesses investing in the UK, or incentives for individuals to back British companies, would send an important signal. They would, of course, cost money in the short term but would support the growth the government ultimately needs.

    I know I’m not alone in thinking this, but the decision to delay the Budget until late November may not be accidental as it gives the Chancellor more time to hope for better growth figures. If that happens then it could potentially soften the blow of whatever tough measures she feels compelled to announce.

    For now, the Chancellor faces a delicate balancing act between fiscal responsibility and political credibility, and between raising revenue and sustaining growth. Whether she succeeds will depend not only on the measures announced next month, but also on whether she can offer a clearer, and more confident vision for the economy than we have seen so far.

    It does all make you wonder whether this will be her last Budget. As we know, political cycles move quickly, and so too do ministerial careers.

    Roger Phillips – tax partner at PM+M – reacts to the Autumn Budget

    Posted on by Laura Boyd

    Roger Phillips, Tax Partner at PM+M: Working people will pay the price for today’s Budget, no matter how much the Treasury dresses it up

    It’s been 112 days since Labour came to power, and after three months of febrile speculation, Rachel Reeves finally delivered the most hyped-up budget that I can remember in 20 years of being a tax professional. This prolonged period of speculation hasn’t been helpful as the markets, businesses and taxpayers have been crying out for stability and certainty.

    Much of the talk in advance of this Budget was around the £22bn black hole, which was there for anyone to see if they had delved into the data which is fairly readily available – and I expect the new government were well aware of this before they penned their manifesto.  As well as dealing with the black hole, it’s clear that this government wants to borrow, spend and grow the economy.

    The Chancellor’s change to the way in which her “fiscal rules” operate, combined with the tax rises that we have seen today, should give her the headroom to do this. But this will come at a cost – a cost which, despite assurances, will fall on the category of people who the government have seemingly been unable to define in the days leading up to this Budget – and the people who they said would be protected from tax rises in their manifesto: “working people.”

    Costs to business – employer’s NIC

    To a degree, the government had tied their own hands in their manifesto by saying that they wouldn’t increase income tax or NIC for working people. The jump in Employer’s NIC to 15% from April 2025 is being spun as Labour having not broken their manifesto commitment, as this cost will be borne by business rather than workers. However, the announcement that threshold at which it gets paid come down from £9,100 per year to £5,000 did come as surprise and will inflict further pain for employers across the UK.

    By the letter of the law, this ‘spin’ may be true. The cost will be paid by employers. However, when this is combined with the increased cost burden in the form of a national minimum wage increase, these costs will undoubtedly be felt by employees in the future, either through reduced pay rises, or in the worst of cases, the loss of jobs for those where these increased employment costs are unsustainable by businesses. The pain is likely to be most felt by those in the already squeezed hospitality and retail sectors despite the announced 40% relief on their business rates. The PM intimated that he doesn’t want people to see lower amounts going through people’s payslips and into their bank accounts but, indirectly, it will, no matter how the government dresses this up.

    Capital Gains Tax, Inheritance Tax and Pensions

    Capital gains tax and inheritance tax are relatively low fund raisers for the government – and paid by relatively few.

    The jump in the rates of CGT (the lower rate will rise from 10% to 18%, and the higher rate will go up from 20% to 24%) will not be huge money spinners for the government. The rates have not been equalised with income tax, as some were calling for, which is sensible. However it is disappointing not to see some kind of relief for inflation being introduced for those realising long term gains.

    IHT appears to be in line for some relatively radical reform. An extension of the freezing of the IHT thresholds to 2030 will pull more families into IHT. The biggest announcement, on which the Chancellor spent a very short period of time announcing, was that inherited pensions will now be subject to IHT.

    Additionally, there will be reform to the BPR and APR rules – effectively placing a cap on those reliefs equivalent to £1m per taxpayer, with anything over and above that being taxed at an effective IHT rate of 20%. Some drastic changes from the current position where pensions can be inherited tax free and shares in family companies attract no IHT on death.

    The government claims that there is ‘no return to austerity’, but with a total rise in taxes of £40bn, this is the largest any chancellor has announced since Norman Lamont in 1993. Time as they say will tell.

    Roger Phillips – tax partner at PM+M – reacts to the March 2024 Budget

    Posted on by Laura Bannan

    It’s fair to say that this Budget threw up no great surprises as there was limited scope for any sizeable changes to tax, spending or borrowing. With the spectre of Kwarteng and Truss’ dual legacy still in the air, coupled with it being an election year, the Chancellor simply couldn’t risk being seen as fiscally irresponsible. He had to tread a fine line of giving away something to appease the right in his own party but without spooking the markets.  I don’t think he could have feasibly done much more as unfunded and grandiose tax cuts were – thankfully – off the table.

    By choosing the cheaper – and some might say less headline grabbing – option of cutting national insurance by a further 2% rather than slashing income tax, the Chancellor has professed to putting more money in the coffers of millions of working people. The changes should mean that someone who earns £30,000 a year will be around £58 “better off” a month when the national insurance cuts that were announced in the Autumn Statement are factored in. However, when you look at it in the round, it will have little impact as we are all still facing the highest tax burden in recent memory – as he didn’t take the opportunity to increase the personal allowance or tax thresholds – and therefore the effect of fiscal drag will likely outstrip the NIC saving for many.

    Cutting income tax would have been significantly more expensive as it benefits both workers and pensioners. The announced cut of 2% in employee NIC will cost about £10 billion a year, whilst a 2p cut in income tax would have cost £13.7 billion a year. I also had concerns that if he did capitulate to the right – and had cut income tax or announced a raft of short-termism, vote grabbing measures – there might have well have been inflationary consequences, so I think he’s made the right call, especially as the government is so constrained by the highest public sector debt levels since the 1960’s, low public spending, weak economic growth and overall tax levels that are beyond the highest level as a share of GDP, since World War II.

    The Chancellor has helped some families by way of a long-overdue reform of the high-income child benefit charge tax trap, largely seen as unfair by many – although he decided to shift the issue further up the earnings ladder for the time being, rather than choosing to get rid of it altogether – so this will please some, but not all.

    The increase in the VAT registration threshold from £85,000 to £90,000 was long overdue – and anything that acts as a barrier to growth should be addressed. The news will cut taxes for some small businesses in the North West and right across the UK – however, he could have been braver and increased the threshold even further – or alternatively he might have considered a more dramatic reform to the VAT registration rules, as has been called for by some well-respected tax commentators.

    There is a fear that the decision to abolish the current ‘non-dom’ status to fund tax cuts for working families could have led to a decline in investment in the UK, as those affected may be more inclined to move to other locations. The abolition of the concept of “domicile” and the introduction of a new residency-based system sounds like a sensible solution – although as ever the devil will be in the detail as to how this will work in practice for those looking to come to the UK – and whether it will have the unintended impact of making taxpaying individuals leave the UK for other shores.

    Other tax changes included the scrapping of the furnished holiday let regime – so a tax rise for those who currently benefit from it, and a modest reduction in CGT for higher rate taxpayers where they sell residential property – the rate dropping from 28% to 24%.

    In terms of stamp duty, we saw the Chancellor abolish multiple dwellings relief. This was not necessarily the stamp duty change that many in the property sector were hoping for.

    This Budget was largely aimed at workers, and it was interesting that there was no real mention of anything for pensioners. Perhaps he is hoping the triple lock guarantee will be enough to win that vote.  In reality, the Budget was always going to be about the election – and making sure nothing was done to rock the country’s current fragile economy.

    All in all, he may have achieved that and hopefully the markets will be reassured. I’m sure the Chancellor is now hoping that he has persuaded some voters that the Conservative party isn’t economically, and politically, dead in the water. That will of course, remain to be seen. It will now be interesting to see when the Prime Minister calls for a general election, and whether there will be enough time for the Chancellor to try to win a few more votes with another fiscal event before that.

    Chancellor delivers economic speech as a ‘plan for growth’ as industry concern grows

    Posted on by Helen Buchan

    Jeremy Hunt has this morning (27 January 2023) delivered a speech on the UK growth plans and his long-term vision for how to boost the UK’s economy, his first big economic speech since the Autumn Statement where he unveiled tax rises and spending cuts worth billions. He outlined his ‘plan for growth’ under 4 pillars (the four E’s of economic growth), which he says are essential for any modern, innovation-led economy:

    Enterprise

    Hunt stated that the UK needs its most dynamic and productive companies if it is to be Europe’s most prosperous economy. He said high taxes directly affect the decisions of investors when looking to invest in Britain and our ambition should be to have “the most competitive tax regime of any major country”, which means “restraint on spending”.

    He wants an enterprise culture built on low taxes, reward for risk, access to capital and smarter regulation.

    Education

    Hunt says that dramatic progress has been seen in education but there is still a long way to go. He admits that “we don’t do nearly as well for the 50% of school leavers who do not go to university as we do for those who do” and if we want to reduce dependence on migration and become a high skill economy, education is essential.

    To do this, he says we must ensure aspiration and opportunity is as open to those who do not go to university as those who do.

    Employment

    Addressing the employment issues currently faced by the UK, Hunt says that if companies cannot employ the staff they need then they cannot grow.

    He said “high employment levels have long been a strength of the British economic model” but the pandemic has had a huge impact on workforce participation. Total employment is nearly 300,000 people lower than pre-pandemic levels with around one-fifth of working age adults economically inactive, which is “an enormous and shocking waste of talent and potential.”

    His aim is to fix what he refers to as the “productivity puzzle”.

    Everywhere

    Hunt explains that his ‘everywhere’ pillar means ensuring that the benefits of economic development are felt not just in London and the South East but across the whole of the UK.

    He says young people should not feel that they need to head south “to make a decent living”, stating this is socially divisive and economically damaging. He added that this is why levelling up is so important.

    The speech was wrapped up by outlining the importance of the UK never forgetting the ingenuity and optimism that is our hallmark.

    With so much noise around the government’s strategy for the economy and today’s announcements from the Chancellor, it will be interesting to see in the coming weeks what predictions we can expect to be announced as part of the Chancellor’s Budget on 15 March.

    PM+M will be holding Budget events on 16 March in East Lancashire and Bury, sharing our insights and analysis on what has been revealed –  to register for one of our events, click here.

    Autumn Statement 2022 – what can we expect?

    Posted on by Rebecca Campbell

    The much-anticipated Autumn Statement on 17 November is going to be crucial in laying out the government’s economic approach for the next few years. Rishi Sunak has already committed to a ‘low tax, high growth’ economy, and the Chancellor, Jeremy Hunt, promises to create confidence and stability in the UK economy, whilst lowering debt – a challenging balancing act.

    What can we expect in the upcoming Autumn Statement, and what measures do we believe the PM and his Chancellor should focus on to achieve short-term (and long-term) growth?

    Tax cuts

    It seems clear that the tax cuts briefly promised by Liz Truss and Kwasi Kwarteng are not going to happen and, in all likelihood, we will all end up paying more tax rather than less for the next few years.

    Corporation tax

    We already know that the corporation tax rate is set to increase from 19% to 25% on 1 April.  The question is what else will be done to business taxes?

    One suggestion is a scaling back of the currently very generous R&D tax credit regime.  A recent report commissioned by the government illustrates that for every £1 of tax relief, the large company RDEC scheme generates more investment by businesses that the more generous SME scheme.  We may therefore see a scaling back or even abolition of the SME scheme.   Much of this has been fuelled by abuse of the scheme by a minority of unscrupulous businesses and advisers and it is unfortunate that this could spoil the relief for those using it legitimately to fund much needed R&D.

    Income tax

    To achieve the sort of tax increases that we need to get the national finances back on track, only income tax, National Insurance and VAT are big enough taxes to make a difference quickly.  Changing the rates of these taxes would mean breaking the triple lock, a core manifesto pledge.  It remains to be seen whether the Prime Minister and Chancellor are brave enough and have the political backing to do that.

    What is probably more likely is an extension of the fiscal creep approach which we have already seen Rishi Sunak apply when he was Chancellor, by further extending the freeze on income tax rate thresholds.  Meaning that more and more taxpayers will be dragged into paying tax and moving up into higher tax rate bands over the next few years.

    We could also see some increases in dividend tax rates.  We already know that the health and social care surcharge, which has been abolished for earnings, will remain for dividends.  The question is whether the chancellor will take that a step further and choose to add further to dividend tax rates.

    Support for hospitality – cut to VAT?

    Although the government have previously recognised the damage caused to the hospitality industry throughout the pandemic, the cost of living and energy crises may be the final straw for many businesses that have barely recovered from the forced closures over the past two years. A reintroduction of the 5% reduced rate of VAT could go some way to support the hospitality industry through the Winter.  Whether that will happen remains to be seen.

    Capital gains tax

    Whilst capital gains tax provides only a small part of the overall tax take, we periodically see debate about whether rates will increase, which in turn provokes a flurry of activity and business sales.

    Rumours are currently circulating that the Chancellor may choose to increase the headline rate of capital gains tax or that he may choose to tweak, restrict or possibly even abolish the principle private residence exemption which currently exempts gains on selling your main residence from tax.  If so, it may be that there is a window of opportunity before changes taking effect on 6 April, although that could have a challenging impact on the property market if property investors or second home owners rush to dispose of them before tax rate changes take effect.

    The UK energy market

    As we all know, the government needs to fix the UK energy market. Part of that solution in the short term is ensuring businesses are less reliant on ‘purchased’ power by increasing their green credentials. Although businesses do currently receive tax relief on investments into green and renewable equipment, it isn’t enough to make it economically viable for most companies to really make the commitment.

    Investment in renewable energy usually sees a payback in 5-7 years, therefore, the introduction of an interest-free loan scheme to promote investment in renewables could be a solution – smoothing out energy costs. Alternatively, accelerated, or enhanced tax relief for companies who do invest in green and renewable equipment (similar to R&D tax relief) could be something else the government consider.

    The property market

    Possible solutions the government may be considering to help solve the housing crisis include:

    • Introducing an annual tax on second homes
    • Tax relief on mortgage interest for first time buyers
    • Stamp Duty exemption for homeowners who are downsizing

    Further strategies could include:

    • VAT exemption on home improvements that reduce energy consumption and reduce carbon emissions

    Pensions and investments

    It is likely that we will see some fiscal creep in the freezing of the pension lifetime allowance at its current £1,073,000 for a further 2 years, thus dragging more pension savings into tax.

    We may also see the Chancellor finally biting the bullet and removing higher rate income tax relief for pension contributions.  Whether this would happen immediately or on 6 April remains to be seen, but if you are planning a lump sum pension contribution soon, making it this week would perhaps make sense.

    Making tax digital

    The next phase of the government’s masterplan to create a real time tax system is Making Tax Digital for Income Tax (MTD for ITSA).  This is due to come into effect on 6 April 2024, meaning that self employed people and landlords will need to start planning for it and moving to MTD compatible digital accounting systems next year.

    It seems clear that there is some way to go for HMRC and the various software houses to get into a position where a viable system will work and, for this reason as well as the fact that it will impose additional compliance costs on taxpayers at a time when many other costs are increasing, we have seen the major accountancy bodies calling for a deferral of the introduction of MTD for ITSA.  I very much hope that the Chancellor listens to this and pushes it back to allow time for a more orderly introduction.

    Get in touch

    Clearly all of the above is speculation.  We will need to wait until 17 November to see what will actually happen to our taxes.

    If however you would like to discuss any of the matters discussed in this article, contact your usual PM+M adviser, or get in touch with Jane Parry by clicking the button below.

    Ensure you are up to date with the Chancellor’s announcements in the upcoming Autumn Statement by attending our seminar on 18 November at Stanley House. Our panel of experts will be providing valuable insights into what the government’s plans mean for you and your business. Find out more and book your place by clicking here.