What tax rises might the chancellor introduce to ease UK deficit?
Potential Personal Tax Increases to Address UK Deficit
The UK government is considering various tax increases in the upcoming budget to address a significant shortfall in public finances, estimated at £22bn. Although major tax rates such as income tax, national insurance, and VAT are not expected to rise, other personal taxes might be targeted. Recent data indicates that increased spending on public services and welfare has driven government borrowing to higher levels than anticipated.
Inheritance Tax
What is it?
Inheritance tax is levied on a person’s assets after they die, but only if the estate exceeds a certain threshold. Currently, no tax is paid on estates worth less than £325,000. The rate on anything above this threshold is 40%, with various exemptions available, such as for property left to a spouse, civil partner, or charity, and for agricultural land and certain business assets.
Who pays it?
Only a small percentage of estates are subject to inheritance tax. For example, in the 2021-22 tax year, around 27,800 estates incurred this tax, representing 4.39% of all deaths.
How much is raised?
Inheritance tax generated £7.5bn in the 2023-24 financial year.
Potential Changes:
The government may reconsider the various exemptions currently available, which could lead to a higher tax take. For instance, tightening rules around the transfer of unused allowances between spouses or reducing residence relief could potentially increase revenue.
Capital Gains Tax
What is it?
Capital gains tax (CGT) is a tax on the profit made when selling or giving away an asset that has appreciated in value. Exemptions include the sale of a main home, cars, and assets given to a spouse, civil partner, or charity.
Who pays it?
In the 2022-23 tax year, 369,000 individuals paid CGT, with large gains contributing significantly to the overall tax collected.
How much is raised?
CGT brought in £14.4bn in 2022-23.
Potential Changes:
One possible change is aligning CGT rates with income tax rates, which could significantly increase the tax burden on higher-rate taxpayers.
Pensions: Lifetime Allowance
What was it?
The lifetime allowance was a cap on the amount that could be accumulated in a private pension scheme without facing additional taxes. This cap was removed last year, but there is speculation it could be reintroduced.
Who paid it?
At its peak, over 11,000 people were subject to the tax in 2021-22.
How much was raised?
In 2021-22, this tax raised £500m.
Potential Changes:
Reintroducing the lifetime allowance at its previous level could generate significant revenue, with estimates suggesting it could raise nearly £800m.
Pensions Relief
What is it?
Pensions relief is a tax break given when contributions are made to a pension scheme. Higher-rate taxpayers receive more substantial relief, which has led to discussions about reducing this benefit.
How much is spent?
The government spent £44.1bn on pensions tax relief in 2021-22, with a significant portion benefiting higher earners.
Potential Changes:
The government might reduce relief for higher-rate taxpayers or equalize the relief rate across all income levels, which could result in substantial savings.
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