Our foreword on this year’s Budget
29 October 18  /  Insights

We are on the morning of the Budget. Recently, I had the pleasure of reading a publication from the Institute of Fiscal Studies (IFS) around some of the options to raise tax and perhaps some of the implications of doing so. 

It was an interesting read and I wonder how many of the options outlined are feasible and how many make it into the Chancellor’s Plans.

Government borrowing is currently 1.8% of income, or £37 billion which is considerably down since 09/10 when it was 9.9% of national income. The Chancellor would like to eradicate this by the middle of the next decade. But there is one problem – he has promised £20 billion of funding from the NHS. If he doesn’t want to increase borrowing, the only options are to increase taxes.

What struck me when reading the report was the comparisons to other countries in the OECD, or Organisation for Economic Co-Operation and Development. The OECD was formed in 1960 when many European countries plus the USA and Canada formed an organisation dedicated to economic development. 

If we look at tax as a share of national income, the UK sits in the bottom half of the table. If we look at Corporation Tax rates, we are close the bottom, so pay much less tax than other countries. Companies in the UK pay 19% on profits, where if you were to look at France, it’s would be approaching 35%. So when you consider that, perhaps it isn’t all bad and should we be surprised if taxes were to rise a little. I often say to clients you cannot have your cake and eat it, so I wonder if things on the whole would be better with a little bit more tax.

The problem you have is who bears the brunt of it, where does it come from, and how does this impact the Political parties own individual agenda, it doesn’t seem to be an easy task.

So let's consider the main options which might contribute towards the £20 billion that has been promised to the NHS and how much this would raise.

  • Increase the rates of income tax, NIC and VAT by 1%.
    This would raise £6b of income tax, £8.2b of NIC and £6.2b of VAT. The combined figure would be £20.4 billion.

  • Increase Council tax on homes – or more commonly known as Mansion Tax
    Doubling the ratio of tax on the top four bands would raise £8.5 billion.

  • Increase Corporation Tax
    Scrapping the proposed reduction in Corporation Tax to 17% would raise £5 billion. But, this would affect households through lower wages, higher prices and reduced returns for shareholder.

  • Reduce tax relief on pension contributions
    If all pension reliefs were given at basic rate income tax this would raise £10.8 billion.

  • Remove VAT exemptions
    Lots of options from education, gambling and small traders. The biggest exemption could be £11.2 billion for Financial Services.

  • Tax gains on main homes
    This is the biggest Capital Gains Tax relief and if it didn’t exist would raise £27.8 billion.

  • Tax older people
    Options might be to remove the exemption of NIC on income once reaching State Retirement Age. This would raise £1.1 billion.
    Charge NIC on pension income received. For every 1% applied this would raise £0.6 billion.
    Apply income or inheritance tax to pension pots on death – unknown amount.

Now I am no politician and I understand they will consider and probably favour their supporting base. If you hit one option hard then you will upset one part of the population or demographic over another. I do wonder whether if common sense prevailed, we applied a bit of all these options at a lower level. That way, all of society contribute in some way but perhaps a smaller amount per individual rather than higher for one and lower for others.

It’s a bit like Financial Planning, there is never an optimum solution but we generally do some of this, some of that, without any extreme decisions or implications. It works and has served our clients well for many years, perhaps that might be a great solution to the problem facing the Chancellor.

But I doubt it! As always, it will come down to Politics. I wonder which way the Chancellor will go. 

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