UPDATED: 'COVID-19 Tax'… Expect it and Accept it!?
Xtract Accounting, the small business Accountants for Directors and Limited Companies, look at the tax changes that might be on the cards in next weeks budget following the COVID-19 public spending splurge.
So it’s positive news this week as the Prime Minister Boris Johnson announces the road map out of Lockdown 3.0, offering us all hope of a return to a normal life by the summer of this year.
However, it is without doubt that the Chancellor, Rishi Sunak, will be thinking less about a Summer Holiday, and more about hiding in the corner of a darkened room.
In a January interview, Mr Sunak said that the Government had so far issued an estimated £280 billion of support to ‘protect jobs and livelihoods up and down the country’. An unprecedented figure which will inevitably be causing sleepless nights for the Chancellor.
The Government has indeed thrown a huge amount of resources into seeing the country through the Coronavirus pandemic, and with the NHS still under significant pressure to treat those with the most severe symptoms, this support won’t be eased any time soon.
“those with the broadest shoulders”
The good news… This splurge in public spending is not really costing a lot right now. The Government can currently borrow money for 10 years and pay less than 0.5% interest per year. So long as the Government can continue to pay the interest on its debt, there will not be an immediate crisis.
The bad news… A day of reckoning will arrive, where the Government will need to take stock and look at bringing public debt back under control… And without mentioning the “A” word (austerity).
The likely result is tax increases aimed at “those with the broadest shoulders”, echoing the words of the Government during the 2008 financial crisis.
But we should also expect broader tax increases, something which has already been hinted at by Chancellor Rishi Sunak in his “chip in to right the ship” comments.
Let’s not beat around the bush… As we approach the March 3rd Budget, the Chancellor is under immense pressure. He has a mammoth task ahead of him, bigger than any task his predecessors ever had to face. Balancing the books Vs stabilising the economy Vs keeping the British public happy. I’m not sure I would want to be in his shoes right now?
One thing is for sure, it is now more crucial than ever for Directors of owner managed Limited Companies to be receiving insightful, relevant, and real-time profit extraction and tax efficiency advice from their Limited Company accountants. You should therefore ask yourself, could your accountant be doing more to help you?
With that in mind, switching your accounts to Xtract Accounting could be the best decision you will ever make! It is free, easy, and quicker than you might think. Contact us today to discover how our proactive and and fixed fee monthly 'FD' service could unlock your income potential.
So, what tax changes could Directors expect to see in the forthcoming budgets?
Freezing the Higher-rate Threshold
Back in 2017/18, the higher rate threshold was increased by more than inflation to £50,000, at which level it has stood ever since. Freezing tax thresholds is the easiest way for Governments to increase taxes without telling anyone and could be easily justified. Could we even see a slight decrease, bringing more individuals into Higher rate tax.
Increasing the Additional Tax Rate
It was in 2013 when the Government reduced the Additional rate from 50% to 45%. Reversing this could be the easier and preferred option to increasing the Basic Rate and Higher Rate, currently 20% and 40% respectively.
Increasing Dividend Tax Rates
We last saw a change in Dividend Tax rates in 2016, the Government’s aim being to clamp down on company owners taking most of their income as dividends and not paying any national insurance – some argue it has not worked! The Chancellor is also coming under increased pressure to 'close the tax gap' between employees, the self-employed and company directors. Forthcoming increases, therefore, are almost a dead cert – perhaps 2.5% on the Higher rate (currently 32.5%) and 1.9% on the Additional rate (currently 38.1%). Maybe even a 1% increase on the Basic rate (currently 7.5%).
Scrapping the Dividend Allowance
The Dividend Allowance was reduced from £5,000 to £2,000 back in 2018, with rumours circling even then that it was to be scrapped altogether. It may well get the boot this time around however, or at the very least, it could be cut to £1,000 (in-line with the Savings, Trading and Property Allowances – each £1,000).
Freezing the Primary National Insurance Threshold
Chancellor Rishi Sunak surprised us all in the March 2020 budget when he announced the Primary Threshold would be increased to £9,500 for 2020/21 – great news for most, but perhaps expect this to be frozen for the next 2 years at least, to allow the Secondary Threshold (for employers) to catch up (or at least that is what Accountants are hoping for!)
Increasing the National Insurance Rates (the ‘NHS Tax’)
Tax increases to help fund the NHS have long been on the cards. Now, thanks to COVID-19, it could finally happen!
Chancellor Rishi Sunak has already hinted at possibly aligning the National Insurance rates paid by self-employed people and by salary earners on income below £50,000 (currently 9% and 12% respectively).
However, with the economy in reverse and job loss announcements coming thick and fast, Chancellor Rishi Sunak could now decide to keep the 3% gap, but instead inflict a small 1% increase for both (i.e. to 10% and 13% respectively). The Government may see this as less controversial at such a delicate time, but they may also announce a gradual closing of the gap over the subsequent 3 tax years.
At present, salary earners, sole traders, and business partners all pay 2% National Insurance on income over £50,000. We would not rule out this being increased by 1% to 3% sooner rather than later.
The Government could ask employers to contribute towards the NHS too. Perhaps the National Insurance rate paid on employee salaries over £8,788 could be raised to 15% (currently 13.8%). However, there would also be the Class 1A National Insurance rate (on Employment Benefits) to consider, something which the Government may not be in favour of at this time.
As an alternative, we could see eligibility criteria for the Employment Allowance, which was increased to £4,000 for 2020/21, restricted even further from 2021/22, with a soft and gradual phasing out of the Allowance altogether thereafter.
Reducing the Pension Annual Allowance
Scrapping of the higher-rate tax relief on pension contributions is something which has been circling the rumour mill for a long time now, simply because of its significant cost to the Government. Some commentators in the pension industry estimate this cost to be roughly £10 billion per year and have widely accepted the loss of the relief at some stage – but to-date, it has not materialised!
The trouble is, scrapping the higher-rate tax relief altogether would likely remove much of the incentive to save into a pension (except for those who also enjoy a generous contribution from their employer), thus undermining the Governments previous push for us all to “save for our retirements” to help reduce the State Benefit burden of the future.
A much easier short-term solution could be to reduce the annual allowance (the amount you can contribute each year) from £40,000 to perhaps £30,000.
And the other tax changes we could see:
Increase in Capital Gains Tax rates, perhaps 5% on both the Basic and Higher rates (currently 20% and 28% respectively).
Increase in the Corporation Tax rate of 2%. It was reduced from 20% to 19% in 2017, but remember, a planned cut of 2% to 17% for 2020/21 was cancelled by Boris Johnson in November 2019 because “further cuts would be too costly”.
Increase in the S455 Tax Charge (for Directors Loans) of 2.5% - in line with the possible hike in the Higher Dividend Tax rate (see above).
Decrease in the VAT Registration threshold to £70,000. The threshold is currently frozen at £85,000 until at least 31st March 2022, but the Government is coming under increasing pressure from The Office of Tax Simplification to bring more businesses in to the realm of VAT.
An increase in the standard rate of VAT of perhaps 2% to 22%.
A Final Word…
It is important to stress that all possible tax changes mentioned above are highly speculative. We do not know what tax changes policymakers have up their sleeves, if any at all. But we would not be surprised to see at least one or two of these measures being announced in the years ahead, perhaps sooner rather than later.
We are also not making any moral judgements about whether any such tax increases would be right or wrong. It is glaringly obvious that the Country's finances will be in mess when we eventually see an end to this Coronavirus pandemic. The same could be said about the finances of the many taxpayers who will undoubtedly want to do what they can to protect their families.
About the Author of this Blog post…
Hi, my name is Gordon Roe and I am the Founder and Managing Director of Xtract Accounting. Having worked in an accountancy practice setting for well over a decade, I had become accustomed to the same annual routine for clients - Books in… Analyse… Queries out… Answers in… Finalise… Accounts and Tax Advice out.
Then, in 2020 I realised I could use advancements in technology and software to significantly improve the relationship between accountant and client, and at the same time, provide an insightful and real-time tax advice service. After all, that is what the modern client expects and deserves!
And so, Xtract Accounting was born…
Xtract Accounting are online accountants based in Lincolnshire, who offer proactive small business accountancy services exclusively to Directors and Owner Managed, Micro and SME Limited Companies throughout the UK.
We specialise in helping Directors Xtract more out for the work they put in!
Our monthly 'FD' service with fixed monthly fees, sees us take on the more proactive role of Finance Director for your business, and offers a plethora of benefits including:
Inclusive accounting software provided by FreeAgent,
Your very own dedicated accountant,
Regular insights into how to maximise your tax efficient (or even tax free!) income,
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Plus, much, much more!
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