Tax increases could still be needed - but where do we go from here
In the wake of the Autumn Statement there has been disagreement about the best way to tackle the recession and grow the economy. Record breaking tax rises have already been announced and will begin to bite in just a few months. Spending cuts, many delayed until 2025, will follow, bringing reductions in investment in infrastructure and public services in real terms. Could this mean that economic growth may be curtailed even further as many are suggesting and that further tax rises may be needed to reverse this decline? If that is indeed the case, where can we look for this additional tax when UK households are already suffering the highest tax burden in decades?
With income tax and National Insurance contributions already increased through higher rates and frozen allowances, changes to capital gains tax (CGT) may need to be considered. Although the CGT annual exempt amount is already set to reduce, so far no changes have been proposed to other allowances and reliefs or to CGT rates; these rates have been historically low since 2016 and possible increases, which would be an easy target, should not be dismissed. Inheritance tax (IHT) rates and reliefs have also remained relatively untouched for many years. However, raising CGT rates, and tinkering with IHT may not be sufficient and future chancellors may need to be a little more creative.
Increases in consumption taxes, i.e. taxes based on how much individuals consume rather than how much they add to the economy may be a solution. VAT is one such tax, but there are other examples. Increases in such taxes, particularly where carefully targeted, may directly help towards achieving the UK’s environmental targets by decreasing energy and fuel use for example, but may also be considered too inflationary in the current economic climate.
Once again this raises the spectre of a wealth tax. A precedent for a one-off wealth tax was announced in Spain earlier this year and is likely to reach the statute books there in December 2022. Spain already has an annual wealth tax, but its effect is patchy across the country due to the powers of autonomous regional governments that have diluted its effect in many regions. However, the new ‘solidarity tax’, being administered by the central government, will apply throughout the country. There will be allowances and reliefs along with credits available for those paying the annual wealth tax and rates will be banded, starting at 1.7% on assets from €3m and 2.1% from €5.3m rising to 3.5% on assets above €10.7m. There will also be a limit to the amount of tax payable by individuals as their combined income tax, wealth tax and solidarity tax should not exceed 60% of their taxable income; however, a minimum of 20% of the solidarity tax due must be paid. Solidarity tax is a temporary measure and expected to last two years – however, this will be evaluated at the end of the proposed two-year period and may then be extended.
Although a wealth tax, even a temporary one, may not be palatable, we cannot rule it out as future chancellors will need to look harder and be more creative in raising taxes to share the burden more fairly.
