Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
The global pandemic has had many devastating consequences, including on the economy. With the Conservative government trying to scramble together measures to support those who were unable to work, there has been a dire effect on the money available for the essentials.
As the government now starts to look forward and attempts to refill empty coffers, there are few who doubt that tax rises will be forthcoming. Never a popular move but unavoidable post-pandemic, tax rises have sounded the death knell for many prime ministers of the past.
Boris Johnson and Rishi Sunak will be hesitant to impose tax rises which are too heavy-handed but they can not escape the desperate need to repair the gaping hole in public finances. With no choice but to raise taxes, what changes are looming in 2021, 2022 and beyond?
National Insurance
This is not an assumed change, but one that has already been announced. From April 2022 National Insurance will be increasing by 2.5%, half to be paid by the employer, and half to be paid by the employee.
This change means that the typical worker in the UK will be worse off by around £244 per year, a hike that was approved by the Commons 319-248 in early September.
The increase in National Insurance will only be in place for a year; in April 2023 it will return to current levels. However, the government will continue to collect more money from the public with the introduction of the new Health and Social Care Levy.
One crucial difference is that National Insurance automatically stops being payable when you reach state pension age. The Health and Social Care Levy will be payable by everyone who works, even those who are pensioners.
The increase will also apply to dividends and employers’ contributions, taking the total rates to the highest recorded during peacetime.
Stealth Taxes
There is not much concrete known about changes to personal tax 2021-2022, but it is unlikely that income tax will be raised directly. However, that does not mean that you will not pay more personal tax.
Often dubbed as stealth taxes, one of the ways that you will indirectly pay more tax is by the freezing of tax thresholds. Rather than rising in line with inflation, when a tax threshold is frozen you will be paying a higher tax in real terms, even though technically there has been no increase in the rate payable.
The government confirmed in March 2021 that the thresholds would be frozen until 2026 at the earliest in order to raise cash. This will mean that households have less money in real terms before they need to start paying tax. During the same speech, Treasurer Rishi Sunak confirmed income tax would not increase. However, he also confirmed that National Insurance would not rise, and the government has done a U-turn on this pledge.
The Institute for Fiscal Studies has confirmed that freezing the threshold on income tax would raise an extra £8 billion per year.
Corporation Tax
Another tax hike the government has already announced is an increase in corporation tax. This will not take place until 2023 when it will rise to 25%, bringing in an estimated £11-17 billion per annum. The 25% only applies to profits over £250,000, whereas profits lower will pay a sliding rate from 19-25%.
Despite not being effective for some time, businesses are already having to cost in the change for their forward financial planning. Combined with the rise in national insurance for employers, there are already significant tax hikes set to come into force.
Online Sales Tax
One of the big concerns for the retail industry has been the shift to online purchases, a situation which has been exacerbated by the COVID-19 pandemic. The Treasury is said to be considering the introduction of a new sales tax which will push up the cost of buying goods online.
The idea was mooted earlier in 2021 but delayed until later in the year. If the government decides to go ahead with the new tax, any purchases made online would be subject to a 2% levy. This would be part of an overall package which would also involve the current business rates being rejigged.
The reception to the online sales tax has been strongly critical, with retailers warning that the costs would be passed to the consumer, which could in turn depress spending.
The general consensus is that it might be too early for the introduction of an online sales tax in 2021, but expect to see the idea considered once more in 2022.
Capital Gains Tax
Capital Gains Tax (CGT) has been on the government’s radar for some time. In June 2020 Rishi Sunak asked the Office for Tax Simplification (OTS) to carry out a review into CGT and to produce a report with its findings.
Published in November 2020 and with the second instalment released six months later, the conclusions from the OTS included several recommendations for the reform of CGT. These recommendations have not yet been acted on, but experts believe that it is only a matter of time.
One of the recommendations was to align income tax and CGT; this would result in a rise in the latter. The OTS advised that a simultaneous drop in the threshold should also be brought in, dropping the allowance from £12,300 to £2000-4000.
The government has opted to freeze the threshold for CGT until March 2026 but over the next few years, it is likely that a thorough revamp of the system will take place. One of the potential changes includes removing the CGT uplift when assets are inherited, meaning that estates worth more than £325,000 could be taxed twice.
Appetite for Change?
Rishi Sunak has made it clear that future spending must be paid for by taxes rather than borrowing, and there appears to be a genuine appetite to overhaul the current taxation system. The economy is too fragile to withstand wholesale changes at the moment but this is liable to change in the next 12-18 months.
Changing the way that the self-employed are taxed or introducing a wealth tax are just some of the measures the government may be willing to consider in the near future.
