In a world that seems to have gone slightly mad we are now fast approaching the third major set of tax announcements in as many months.
We are on our third prime minister and fourth chancellor in less than six months. We have seen tax policy shift from an orthodoxy of higher taxes with targeted subsidies under Rishi Sunak, through a throwback to 1980s policies of swingeing tax cuts and trickledown economics, to a return to what is looking like even higher taxes but with reduced capacity to spend money on ‘picking winners’.
Navigating away from a black hole
We now approach the Autumn Statement with Rishi Sunak and Jeremy Hunt at the helm. Despite the Autumn Statement normally being the day when the chancellor gets to shine, we can’t help thinking this set of policy announcements will have the prime minister’s stamp all over them.
The narrative coming from the Treasury and Downing Street has been one of ‘black holes’ and ‘difficult decisions’. The emerging theme is that there is a gap in the finances of more than £50bn that government is looking to fill with an approximately 50/50 mix of tax rises and spending cuts.
The chancellor needs to deliver a statement that wins the confidence of the City in a way that is also politically palatable. The prime minister favours a return to the principles of the 2019 Conservative manifesto, which gave his party the mandate to govern. That manifesto promised no increases in the rates of income tax, national insurance, or VAT. These are the three major workhorses of the UK tax system, contributing approximately two-thirds of the total tax take. With these three taxes off the table, other tax rises will have to work so much harder. Mr Hunt needs to deliver tax increases that pluck the goose to the max without ruffling too many feathers. Any rises also need to feel ‘fair’ to the voting public but without alienating the Conservative core voting base.
This suggests, as is broadly reported in the media, a lot of stealth taxes and taxes on immovable taxpayers – those who can’t simply relocate to avoid the tax.
Against this turbulent background, what might we see in the Autumn Statement?
Investor confidence in the UK has taken a beating over the last few months. The double U-turn on the headline corporation tax rate has done the UK few favours in positioning itself as an attractive investment location.
Kwasi Kwarteng and Liz Truss’s plans to freeze the corporation tax rate at 19% were never going to drive significant investment. Many businesses were already anticipating 2024 to bring a Labour government which would increase the corporation tax rate to 25%. Freezing the rate was largely seen as a two-year moratorium on the rate hike and so was never likely to reap large investment benefits.
The super-deduction, which provides a 130% immediate tax deduction for certain capital spend, is due to end in April 2023, just as the headline corporate tax rate increases. This incentive was largely intended to encourage businesses to invest in capital expenditure in advance of the rate hike.
While Mr Kwarteng was silent on any replacement for the super-deduction, the unveiling of plans for investment zones as part of the Growth Plan implied favouring first year allowances in those areas, rather than the blanket super-deduction. But investment zones look unlikely to survive the Autumn Statement and we may see a return to Mr Sunak’s preferred levelling up tool of Freeports.
When Mr Sunak was still chancellor there had been some discussion about a replacement for the super-deduction. We may see these discussions rejuvenated but it is difficult to see any give-aways for business, especially something like the super-deduction, as this would be a fairly quick drain on tax revenues.
It will also be interesting to see if there is an update on the UK’s implementation of the global minimum tax under the OECD’s BEPS 2.0 initiative. Implementation of a minimum tax has hit some roadblocks in important jurisdictions such as the EU and the US. The UK remains committed to implementing the proposals and nothing is expected to change there, but we might see some announcement on timings.
Our view: A quiet Autumn Statement for most businesses with no give-aways
Windfall tax on energy
That said, there is always an exception to the rule and this year the most likely exception is for the energy sector. It’s likely that the windfall tax on energy companies (the Energy (Oil & Gas) Profits Levy) will be extended until 2028 (it was due to expire at the end of 2025) and levy might increase from 25% to 30%. The scheme may also be expanded to electricity generators. It is estimated this could raise £40 billion over five years.
Our view: A high probability that we will see an extension to the windfall tax on energy companies.
There have been rumours of a windfall tax being imposed on banks. These rumours have largely died down, but we are still waiting for an announcement on what will happen to the banking surcharge when the corporation tax rate rises.
Mr Sunak’s proposals, made while he was chancellor, were for the corporation tax rate to rise to 25% and the banking surcharge to fall from 8% to 3%, neutralising much of the impact of the increase in the headline tax rate for banks.
The government said there would be an announcement on the banking surcharge in the Medium Term Fiscal Plan, originally scheduled for the end of October and which has been replaced by the Autumn Statement.
With a banking surcharge of 8% and a headline corporation tax rate of 25% banks would face a 33% tax on profits from April 2023. Banks will be keen for the surcharge to stay at 3% as originally planned to ensure the sector remains internationally competitive.
It is possible that insurance premium tax (IPT) could be increased. IPT is an indirect tax imposed on insurance policies but at a much lower rate than standard VAT. Never a headline grabber, it is one of those taxes that voters may believe is borne by the insurance company while in fact it is passed on to them. An increase in the IPT rate would tick the stealth tax box that we are expecting in this budget.
Our view: High probability that the banking surcharge will be cut to 3% as planned from April 2023.
We expect to see the most significant tax announcements in personal taxes. The general theme is that those with the broadest shoulders will be expected to pay more.
Reports are rife of stealth taxes on individuals through freezing tax thresholds, many of which are already frozen until 2025/26. It appears that the chancellor is considering extending the freeze for a further two years.
When the freeze was announced in March 2021, the Institute for Fiscal Studies estimated that it would raise £1.5bn in its first year, rising to £8bn by 2025/26. But that was when inflation was still quite low. Recent wage growth means more people are being dragged into higher tax brackets.
Extending the freeze in thresholds does not raise any immediate revenue for the government nor does it cost taxpayers anything in the short term but it would bolster the public finances. It could potentially pave the way for a bonfire of threshold freezes just prior to a 2024 election if the nation’s finances have recovered sufficiently by then.
Income tax rates
We expect that income tax will not go up, in line with the 2019 manifesto. Nevertheless, there is talk that the 50% additional rate may return. Anything is possible but the previous 50% rate did not bring in the promised revenue – in fact income tax receipts increased when it was fell to 45% under the Conservatives. A more likely scenario would be a drop in the current additional rate threshold of £150,000 as technically this wouldn’t breach the manifesto.
The 1p reduction in the basic rate of income tax, originally promised when Mr Sunak was chancellor for 2024 and brought forward to 2023 by Mr Kwarteng, is now permanently on hold until the public finances are in better shape.
Our view: Expect income tax thresholds to be frozen for another two years. An increase to the 45% rate is unlikely but a drop in the additional rate threshold is possible. The 1p reduction in the basic rate of income tax will remain a blip on the horizon.
Another rumoured change is a 1.25% increase in employer’s national insurance contributions. This would effectively reverse the reversal of the Health and Social Care Levy (you know what we mean), but only in part.
This would protect workers’ take-home pay but would be a blow for labour-intensive businesses. It would also increase the distortion between the employed and self-employed, which is not good for the tax system.
Our view: An increase in employers’ national insurance is quite possible. If introduced as a new levy rather than an increase in national insurance it would arguably not breach the manifesto commitment to freeze the rate.
Capital gains tax (CGT)
The Office of Tax Simplification (OTS) has previously recommended aligning capital gains tax rates with income tax rates. Mr Sunak rejected this recommendation last year, but the economic situation means it is back on the table. The highest CGT rate is currently 28%; this applies to gains realised from the sale of real estate. If the chancellor were to equalise CGT rates with income tax rates he may reintroduce some form of indexation relief.
Our view: A high probability of an increase in the CGT rate, either equalising the rate with income tax rates while introducing indexation relief, or introducing a smaller increase but without indexation relief. A blessing from the OTS helps.
Some commentators have wondered whether CGT allowances and reliefs are also up for review. These include Business Asset Disposal relief, which reduces the CGT rate to 10% on taxable gains of up to £1m.
Our view: Unlikely to see a change in CGT allowances and reliefs as some have recently been reformed and changes would not raise much revenue.
One report suggested that the Principle Private Residence relief, which exempts gains realised on disposal of a main home, might be abolished. This would seem an extreme measure, even though it is one of the most expensive reliefs in the tax system and costs the government some £28bn a year.
Our view: Highly unlikely that the Principle Private Residence Relief will be abolished as this would stall the housing market and would be a difficult political sell.
Another option for the chancellor would be changes to dividend tax. This may involve an increase in the tax rate by 1.25%,meaning a tax rate of 40.60% for additional rate taxpayers. A cut to the £2,000 tax-free dividend allowance is also being considered.
Our view: A high probability that dividend tax rates will rise and the tax-free allowance be cut.
Pension tax relief
A perennial favourite in the rumour mill is changes to the tax system for pensions.
The lifetime allowance, which limits the amount a person can save into a pension whilst maintaining the most beneficial tax benefits, was frozen at just over £1m from 2020/21 until 2025/26. The chancellor is considering extending the freeze, potentially dragging many more into high tax charges on pension pots above the lifetime allowance.
The chancellor is also considering limiting the amount of tax relief which individuals can obtain on their annual pension contributions, perhaps to a flat rate of 20%.
One issue with either of these ideas is the impact they would have on forcing earlier retirement in sectors where the government desperately needs people to continue working, particularly the NHS. In 2020 Mr Sunak increased the adjusted income threshold at which the annual pensions allowance is tapered away from £150,000 to £240,000 precisely because of this issue; it would be difficult to draft legislation that changed the rules for workers in all sectors other than the NHS.
There has been some past suggestion of flat rate relief of 30%. This would see basic rate pension savers get a boost to their pensions savings whilst higher rate pension savers would still benefit from some enhanced relief, the revenue from higher tax payers would flow to basic rate taxpayers, meaning it might not raise significant additional revenue for the government.
Our view: Expect the pensions lifetime allowance to be frozen. A cut in tax relief for pensions contributions to 20% is less likely without a consultation.
Non domiciled regime
The non-domiciled (better known as the non-dom) regime allows non-UK domiciled individuals who are resident in the UK to pay tax only on overseas income and gains if they are remitted to the UK.
The proposal is that the amount of time an individual can claim non-dom status will be reduced from a maximum of fifteen years to five years, raising an estimated £1.6bn a year.
Our view: While there is political pressure to review the non-dom regime it is more likely we will see a consultation before any radical changes are made.
Another stealth tax on the table is freezing the nil-rate inheritance tax band, which currently stands at £325,000 and which has already been frozen until April 2026. This would seem an easy measure to announce.
Our view: Expect the nil rate inheritance tax band to be frozen for a further two years.
What we will not see in the Autumn Statement
So much for what we expect to see. But what important issues do we think won’t be mentioned in the fiscal announcement?
Net zero incentives
Although Mr Sunak did end up going to COP27 in Egypt, we have yet to see any clear policy on how tax will help achieve net zero. Businesses want to see more incentives for green investment to encourage private sector innovation. But given the current economic outlook it is unlikely there will be any radical announcements on green investment in the Autumn Statement.
It feels like time is running out and the government has to do some heavy lifting around how the tax system will interact with net zero. That doesn’t just mean incentivising green investment ̶ it also means thinking about alternative tax revenue streams when, for example, fuel duty fails to exist.
Business rates reform has been on the government’s agenda for several years but keeps getting kicked into the long grass, and that is likely to happen again. The online sales (OST) tax consultation has also gone very quiet. This and business rates are linked as the revenues from the OST were intended to partly finance business rates reform.
It is unlikely that the chancellor will introduce an OST now as this would most likely be passed on to consumers hitting them in the middle of a cost-of-living crisis.
Business rates may become the new stamp duty land tax. Everybody knows reform is needed, but nobody knows how to do it, so the tax languishes on the statute books.
Wealth taxes have raised their head with an MP’s questions to the Treasury and the Labour leader under pressure from campaigners, unions and his MPs to set out proposals for a wealth tax. So far neither political party has bitten. Talk about this will carry on whilst the cost-of-living crisis continues, especially as any wealth tax could produce significant revenue that could be used for societal goods, such as net zero. However the government has previously ruled out a wealth tax and we don’t expect that position to change in the short term.
The interaction of personal tax thresholds and the withdrawal of allowances and benefits can lead to pockets of excessively high marginal tax rates and distortions in the labour market. These distortions have existed for years and should be ironed out, but successive governments have shown little appetite to tackle the problem.
An individual earning income over £50,000 moves into the 40% tax bracket but £50,000 is also the threshold at which child benefit begins to be withdrawn. This leads to a high effective marginal rate of ‘tax’ on earnings between £50,000 and £60,000 (68% for a family with three children).
When income hits £100,000 the personal allowance starts to be tapered away at a rate of £1 for every £2 of income over £100,000. This leads to an effective rate of tax of 62% (including employee’s national insurance) for incomes between £100,000 and £125,000. These distortions can create serious disincentives to work.