The second Budget of 2020 could mark the start of a round of tax increases.

The first of 2020’s two Budgets took place on 11 March, the day that the World Health Organisation declared Covid-19 a pandemic. At the time, the Office for Budget Responsibility (OBR) calculated that the UK government would need to borrow about £55bn in 2020/21. By mid-July, that estimate had risen to £322bn – almost six times the original figure.

No government can continue to borrow at such a rate and many economists regard the Autumn Budget as when the brakes will start to be applied. The Chancellor is constrained by manifesto pledges not to increase tax rates, but as his predecessors have consistently demonstrated, there are many ways to increase tax that do not involve changing the rates. In particular, three areas of reform are already being considered.

Pensions

HMRC has put the gross cost of income tax relief for pensions at over £37bn in its 2017/18 figures, with a further £16.5bn for national insurance contributions (NICs) relief. In July 2020 the government launched a consultation on a technical aspect of pension income tax relief, a move which could be a precursor to a broader reworking. For example, a flat rate of tax relief for all pension contributions could be introduced.

In the March 2020 Budget, the Chancellor added to the cost of pensions tax
relief by relaxing the annual allowance rules. There would be a certain symmetry if, in his next Budget, he clawed some money back by reducing tax relief for higher and additional rate taxpayers.

Inheritance tax

Two years ago the then Chancellor commissioned a report on simplifying
inheritance tax (IHT) from the Office of Tax Simplification (OTS). The OTS
eventually issued two reports, but no action was taken in the March 2020
Budget.

Matters may be different come autumn. HMRC statistics show that last year IHT receipts fell for the first time in two years. The drop is possibly attributable to the Residence Nil Rate Band (RNRB), introduced in April 2017. The OTS reports made no recommendations about the RNRB on the grounds that it had only just come into being, but it did note widespread criticism of its complexity.

A Chancellor with an eye towards a ‘levelling-up’ agenda and a need for more revenue could pick and choose from the OTS reports’ recommendations to collect more IHT.

Capital gains tax

In July 2020 the Chancellor gave the OTS another tax review to undertake. This time capital gains tax (CGT) was the subject and there was less emphasis on simplification and more on ensuring “the system is fit
for purpose”.

Many economists regard the Autumn Budget as when the brakes on borrowing will be applied.

There is a real possibility that CGT rates will once again be aligned with income tax rates, which could see the top CGT rate increase from 20% (28% for non-exempt residential property) to 45%.

Ahead of the Autumn Budget, there are mitigating measures that could be taken in any of the three areas mentioned above. However, pre-Budget tax planning requires advice to avoid unnecessary or inappropriate actions.

The levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

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