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Budget deficit – what could this mean for our taxes?

With the Autumn Budget just around the corner, Hannah Duncan looks at the job at hand for Rishi Sunak and what this could mean for our taxes.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Not many people would want to swap places with Chancellor of the Exchequer, Rishi Sunak right now. The effects of the pandemic have left an eye-watering £320+ billion hole in the public purse and counting. Sunak’s tasked with pulling Britain out of the largest single deficit since World War II.

On top of this he must find a sustainable way forward for the staggering 2.7 million Brits now relying on unemployment benefits. Finding a solution for young people and boosting businesses, all while trying to rake back much-needed cash is a near-impossible task.

So how might he go about it, and what could this mean for our taxes?

This article isn’t personal advice. Tax rules can change and their benefits depend on your personal circumstances. If you’re not sure if an ISA is right for you please ask for advice.

Government will firstly borrow as much possible

To raise funds, governments have two options, they can borrow money or raise taxes. To start, it looks like they’ll be going with the former. The government will raise revenue by issuing bonds – or “gilts”, which investors can buy on the stock market. The Bank of England will play a big role in raising this money and have already committed to buying up a bulk of the bonds.

Sunak has already warned us that it’ll be, “A severe recession, the likes of which we haven’t seen”. So the question is will this be enough?

If the answer’s no then this won’t bode well for any chance of our taxes staying the same.

An increase in taxes could be on the horizon

Increasing taxes would surely slow an economy they’ve tried to stimulate, but a recent survey showed that more than seven out of ten MPs expect a tax raise.

Politically speaking, this is awkward. The Conservative Manifesto pledged that there wouldn’t be any increases to income tax, National Insurance contributions or VAT. However, nobody could’ve predicted a pandemic would grind the world to a halt. There might be no alternative and some political promises might have to be broken.

Where could we expect to see increases?

Income tax

Income tax seems to be one that experts keep coming back to. Some believe that, despite the manifesto promises, this would be the most strategic starting point. Income tax, which is paid proportionally to how much money an individual makes, is the government’s main source of revenue.

A small change could bring in a lot of money.

National Insurance Contributions

The self-employed have an advantage when it comes to National Insurance contributions as they normally don’t have to pay as much. But after the coronavirus support scheme, that might be about to change.

We could see the contributions rise for self-employed workers as things get closer to returning to normal. This could be to help cover the bill for the support they received while the nation was locked down and business had no doubt dried up.

Value Added Tax (VAT)

Our VAT brings in a lot of money for the government. Over the 2018/19 tax year, it brought in a whopping £132 billion. Sunak has slashed the 20% levy down to just 5% to support hospitality, arts and entertainment. However, when the time comes to move it back up again, it could go a little higher than before.

Alternatively, we could see some new taxes.

The treasury is now considering an online sales tax. This would target the e-commerce sector which largely benefitted over the lockdown period. It could also incentivise shoppers to head back out to the high street, boosting retail employment. It’s been estimated that adding a 2% tax to online goods could bring in an extra £2 billion each year – this would only help line the public purse.

But a balance might need to be struck here as this has already faced some criticism for punishing innovation.

Taking away tax relief

Millennials have had to stump-up more taxes than any other generation. And some experts insist that they simply can’t pay anymore. This might lead to tax relief rewinds, targeting those above 40 years old.

There’s some speculation that main residence relief for property sales could go. This might mean that sellers will have to pay Capital Gains Tax on their main home, which they’re currently exempt from.

Across the board, we could also see changes to the Capital Gains Tax bands and allowances. This means that we could start paying a greater share of tax for profits on investments, trusts or properties.

Tax breaks on private pension contributions or withdrawals could also be up for discussion. At the moment, pensions like HL’s Self-Invested Personal Pension come with lots of tax perks, but this could be on the chopping block further down the line.

What to look out for

We don’t know what will happen to taxes in the near future and at the moment it’s all just speculation. In October, Sunak will unveil the Autumn Budget which could help to provide a little more clarity and direction.

For the time being we think investors should stick to what they know. That means making the most of your allowances while you can. Whether that’s through your ISA allowances or tax relief through your pension contributions, now might be the time to take any tax breaks you can get.

Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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