The Financial Times reports that the Chancellor Rishi Sunak has agreed to stick with a Conservative Manifesto Commitment, referred to as the ‘tax triple lock’, which would stop him from raising rates of income tax, National Insurance or Value Added Tax. With huge spending already incurred supporting jobs and businesses during the pandemic, and a stated objective to return the nation’s finances to a sustainable footing longer term, the Chancellor will need to look elsewhere to cut the deficit, raising the prospect of increases in other taxes or cuts in allowances and tax reliefs.
Steven Cameron, Pensions Director at Aegon comments: “The huge amounts being spent protecting jobs and businesses throughout the pandemic have been a welcome support for millions, but the sheer size of the deficit means it’s not a case of if, but when and how the Chancellor will increase taxes to begin to return the nation’s finances to a sounder long term footing. If as is being reported the Chancellor has agreed to maintain the Tory Manifesto commitment of a ‘tax triple lock’, he’ll be unable to increase rates of income tax, national insurance or VAT, which raises the prospect of increases in other taxes or cuts in allowances and reliefs. This could have wide reaching implications for savings, investments and pensions.
“A report prepared by the Office of Tax Simplification at the Chancellor’s request into Capital Gains Tax created speculation of an increase in the rate of CGT or a reduction in allowances. This could impact those investing outside tax favoured ISA and pensions wrappers as well as second home owners. It could also adversely affect business owners who sell their businesses although the Chancellor could avoid discouraging entrepreneurship through more generous business asset disposal relief.
“There’s also ongoing speculation that Rishi might change the tax breaks on offer to those saving in pensions. One rumour is the Chancellor is attracted to moving to a flat rate of tax relief at 25% rather than topping up individual pension contributions based on the individual’s ‘marginal’ income tax rate. This would be good news for basic rate taxpayers who could receive a larger top-up but not for higher and additional rate taxpayers who’d receive less generous top-ups than currently.
“While the triple tax lock would mean the protected tax rates couldn’t be increased, there could be other adjustments to how they are applied. One possibility would be to remove the exemption from National Insurance on earnings above state pension age. Another more radical reform would be to align income tax and National Insurance treatment of employees and the self-employed.
“A commitment to the tax triple lock might make it harder to also commit to the state pension triple lock which currently increases state pensions at the highest of inflation, earnings growth or 2.5% a year, at considerable cost to those of working age.
“Those at risk of losing current incentives might seek advice on acting sooner rather than later. It may be that more radical or complex changes take some time to implement because of many complexities, but even if not announced as early as the March Budget, they could feature in a second Budget later in the year.”
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