Prepare to pay more tax whoever wins the election
Taxpayers face a struggle to balance their finances as fiscal screw tightens
As Britain gears up for the party political conference season and next year’s general election, voters have some big questions to consider.
Not the least important for many is: what will happen to personal taxes?
The Labour party, riding high in the polls, last week sought to woo well-off voters by promising that an incoming Labour government would not hammer the wealthy. Rachel Reeves, the shadow chancellor, said Labour had “no plans for a wealth tax” and ruled out higher levies on capital gains and property income.
Meanwhile, prime minister Rishi Sunak is under pressure within his party to make tax a key dividing line with Labour. Conservative MPs have called for tax cuts to be announced before the election, with the abolition of inheritance tax touted by some as a potential vote winner.
But sluggish economic growth, high inflation and the shock of the pandemic have worsened the public finances — leading some economists to sound the alarm about Britain’s soaring debt bill. These cold hard facts leave little room for manoeuvre for any government as the Institute for Fiscal Studies argued in a recent report on the long-term health of the nation’s tax system.
“Unless something major changes — such as an acceleration in economic growth — it will not be possible to maintain public services and keep tax at current levels. The choices that face future governments are not enviable,” says the IFS.
FT Money assesses the difficult outlook for tax and asks what people can do to safeguard their personal finances in the face of a tax burden that is almost certain to increase.
Political promises
A straw poll of FT readers shows widespread concern. As one contributor, Joel Bhatt, wrote: “I don’t think we can balance the books without reducing the government’s commitments and simultaneously increasing taxes.”
Advisers also report their clients are worried, both about the general tax outlook and the plans emerging from the Tories and Labour alike.
Nimesh Shah, chief executive of accountancy firm, Blick Rothenberg, said: “People are anxious about what the Conservatives are going to do with their pre-election Budget, in terms of the promises they will make, and people are anxious, very anxious, about Labour and some of the policies that are being talked about.”
He added that Reeves’ pledge last week not to raise taxes on wealth, capital or property income had failed to completely reassure his clients, with many sceptical that the comments were “purely political positioning to pre-empt the inevitable attack from the Conservatives that a Labour government will unleash a ‘tax bombshell’”.
Michelle Denny-West, a tax partner with another accountancy firm Moore Kingston Smith, said that while Reeves’ comments said what “will not be done” by a potential Labour government, they said “little about what will be done”.
Manifestos are still being written but some specific pledges have already been made. These include Labour’s promise to abolish the non-domicile regime and use the tax raised to increase recruitment and training of NHS staff, as well as boost spending on school breakfast clubs. The party has said a future Labour government would replace the non-dom regime with a “clear, simple, and modern system” for people living in the UK for short periods.
It has also pledged to levy VAT on private school fees, saying the money would be used to increase state school spending. The party also plans to end a tax break used by private equity executives to reduce taxes paid on their share of profits, known as carried interest.
Meanwhile, Jeremy Hunt, the chancellor, has ruled out big pre-election tax cuts this autumn. He told the Financial Times recently that he must “double down” on inflation and would not “pump billions of pounds of additional demand” into the economy.
Moreover, the scope to do anything big has been curtailed by last autumn’s “mini Budget” which triggered mayhem in financial markets after the then chancellor’s debt-fuelled tax-cutting plans surprised investors.
Dawn Register, head of tax dispute resolution at BDO, says: “The learning from the mini Budget will last for a generation. You can’t see any chancellor doing something wild.”
Tax cuts or tax rises?
While future Tory tax cuts may or may not materialise, the Conservative government’s record so far has been to raise the tax burden to the highest since the 1940s.
UK tax revenue is forecast to total £950bn in 2023-24, equivalent to 36.9 per cent of gross domestic product, estimates the IFS. Under current government plans, tax revenue is forecast to rise to 37.7 per cent of GDP by 2027-28, which would be the largest share of national income taken in tax since at least 1948. And that is without any extra levies from Labour.
The increased take is mostly effected via “stealth” taxes — notably the freezing of allowances and thresholds at which tax is paid — from April 2022 to 2028.
This “fiscal drag” approach is especially potent at a time of higher inflation, as nominal earnings go up, taking more people across thresholds even if their real incomes are flat or falling.
In the November 2022 Budget, the chancellor also cut the threshold at which the 45 per cent additional income tax rate hits earners from £150,000 to £125,140, with effect from April 2023.
Overall, this process will see 2.5mn more taxpayers brought into the higher and additional rates of income tax by 2027-28, according to the IFS. That’s 2.1mn more paying higher-rate tax — a projected total of 7.8mn. And 400,000 more people will pay additional-rate tax, or 1.7mn altogether.
The government’s decision to freeze the inheritance tax exemption, known as the nil-rate band, since 2009 has already boosted tax receipts. Britons paid record inheritance tax of £5.76bn in 2020-21, up from £2.7bn in 2010-11.
There were also record capital gains tax receipts of £16.7bn in 2021-22, driven by rising asset values and a significant cut in entrepreneurs’ relief.
Now, drastic reductions in the dividends and CGT allowances will squeeze people’s finances in the years ahead. The dividend allowance halved from £2,000 to £1,000 this April, and will halve again to £500 in April 2024. The CGT allowance was cut from £12,300 to £6,000 this April and will be cut again to £3,000 next spring.
“The big issue is the fiscal drag and that is hard [to do anything about]. The impact of that on such a wide reach of population is massive,” says Register.
She warns that the government is also due a big boost from January because more people will pay tax on savings after interest rates climbed.
Basic rate taxpayers can earn up to £1,000 tax-free in interest from their savings. This falls to £500 for higher rate taxpayers, while additional rate taxpayers have no allowance at all and therefore pay tax on all their interest.
Both main political parties are happy to keep the electorate guessing on capital gains taxes, according to Chris Etherington, partner at accountancy firm RSM. He says that speculation that CGT might go up has prompted people to crystallise gains.
“The Conservatives have . . . done nothing to dispel those rumours and they’ve ended up with bumper tax receipts,” he explains. “If Labour were to get into power and continue with the line that they have ‘no plans’ to raise CGT, it’s not a categorical no . . . People will fill in the gaps themselves and you could end up with bumper tax receipts without doing anything.”
Most advisers predict there is almost no chance of cuts in overall taxes after the next general election and every prospect of increases. “Any government is going to have to grapple with tax and how we fill the coffers,” said Julia Cox, partner at law firm Charles Russell Speechlys.
IFS tax experts offer taxpayers a crumb of comfort, pointing out that tax rises are not a certainty since decisions will depend ultimately on what voters want. But lower taxes would come at a heavy price.
“It is not inevitable that taxes will rise — UK voters have a choice. But the choice is harder than it has been for decades. Without tax rises, UK public service and benefits provision will not simply tread water, it will deteriorate.”
What can you do to protect your finances?
There is little one can do to temper the impact of fiscal drag. As Denny-West of Moore Kingston Smith says: “It’s a very clever tax rise.”
Meanwhile, the uncertainty about the post-election tax outlook makes planning hard. Advisers generally caution against accelerating decisions based on speculation. “Crystal ball gazing” is “dangerous” warns Register.
People should concentrate on the basics — taking advantage of existing allowances and maximising Individual Savings Accounts (Isas) and pensions, as well as gift aid, several advisers told FT Money. Spouses can divide their financial assets better between them to maximise their allowances, including on bank interest.
Many more people might need to file a tax return for the first time if earned bank interest takes them above their personal savings allowance. They should register for a self-assessment tax return, to inform HM Revenue & Customs they have tax to pay, by October 5.
Non-doms would be well advised to look at their options now, given the clarity of Labour’s intentions. David Lesperance, founder and principal of international tax advice firm Lesperance & Associates, says he is seeing many more non-doms considering whether they should stay in the UK or move. He likened the necessary contingency planning to having a “fire escape plan” if the “worst were to happen and a wildfire hits your house”.
Shah says Labour, in particular, should be careful not push wealth out of the country. “People are really nervy about what the tax system is going to look like.”