NIC and corporation tax rises are coming but will other taxes rise?

By Neil Williams, Tax Partner

21 September 2021

The tax climate has clearly changed since the pandemic and the Government has already announced tax rises that would have been unthinkable just two years ago. So what does this mean for professional services businesses and can more tax rises be expected?

NIC/Health and social care levy

The 1.25% increase to NIC for 2022/23 and the follow-on launch of the Health and Social Care Levy for 2023/24 has now been approved by Parliament so businesses should be actively considering the impact that it will have on their cashflow for next year.

It is important to remember that this is an across-the-board increase in NIC and so it applies to Class 1 NIC (including Class1A and Class 1B paid by employers on employee expenses and benefits) and Class 4 NIC. There is also to be a 1.25% increase to the tax rate on dividends for 2022/23. You can read more about how this will work here.

  • Businesses will see their cashflow affected in several ways by this change. Firstly, costs of employing staff will increase by 1.25% reducing monthly cashflow. It also means that staff take home pay will fall leading to inevitable pressure for higher basic pay rises as well.
  • Secondly, businesses operating through partnerships or as sole traders will see their personal NIC payments for 2022/23 increasing by 1.25%. With basis period reform proposals potentially bringing much more profit into charge in the 2022/23 tax year, that transitional profit will also be liable to NIC at the new rate.
  • Thirdly, if the business operates through a company, any dividends received from that company will suffer income tax at a higher rate.

More tax rises on Budget day?

Since the NIC rise has been announced there have been rumours that any further tax announcements on 27 October will be “technical” ones not raising tax rates. Of course, holding a ‘technical budget’ gives the Chancellor plenty of scope to make changes that raise revenue without raising headline tax rates.

Remember that stealth tax rises have already been announced, for example, freezing personal tax allowances from April 2022 will raise considerable revenue due to fiscal drag (ie allowances not rising as wages/inflation goes up means more tax is collected). With inflation on the rise, these are likely to be a nice little earner for the Chancellor over the next few years – so more freezes could well be on the cards.

Businesses operating through partnerships will be very much aware that the 'reform' of basis periods for the self-employed, badged as a simplification measure will, in practice, accelerate tax payments for individuals for 2023 and the next 5 years.

Commentators are still predicting changes to Inheritance Tax and Capital Gains Tax following recent ‘simplification’ reviews by the Office of Tax Simplification – after all IHT is increasingly bringing in more tax for the Treasury (a record £571m in July 2021). In theory, it would be straightforward to ‘simplify’ many IHT rules with the result that future IHT revenues are increased without most taxpayers understanding the changes (or being affected).

It seems less likely that the Chancellor will increase capital gains tax by aligning rates with income tax rates – this would be a more visible tax rise but may not collect a great deal relative to the total tax take. However, perhaps ‘technical’ changes like reducing the annual gains exemption or cutting back other CGT reliefs are a more likely option.

Finally, every Chancellor likes to be seen as collecting more revenue from “tax avoiders”. Currently, HMRC is highly focused on tax errors and avoidance related to pandemic support and the government might offer some form of limited amnesty (usually called a ‘disclosure facility’) to all those coming forward to correct mistakes in the short term. See our Budget 2021 hub.

Tax Day announcements bypasses tax rises

15 April 2021

Despite press speculation about the Chancellor taking preliminary steps towards tax rises on Tax Day, he played a straight bat: there were no proposals on taxes tipped for future rises and the consultations focused implementing HMRC’s 10 year plan to make the UK tax system fit for the digital future – read more

So has the tax rise can been kicked into the distant future? 

I’m not convinced: if the economy does boom after lock-down perhaps major tax rises will not materialise. However, if the Government’s finances still look strained at the time of an autumn Budget, there may well be tax rises in the areas discussed below

One thing we can be certain of is that all businesses should expect much more scrutiny from HMRC in the future as it looks to reduce the ‘tax gap’ by clamping down on tax avoidance, errors and outright fraud related to COVID-19 support packages. For example, any businesses that have furloughed staff during the pandemic should have their claims professionally checked so that errors can be put right and payments made before HMRC spots them. 

How far have tax rises been kicked down the road?

17 March 2021

In December last year, I reflected on the great debate circulating at the time about which possible tax measures Rishi Sunak was going to include in his recently announcement Budget date. The article, shown below, covered an assortment of recommendations from government bodies and committees, including the much debated perceived inequalities in the taxation of capital versus labour. In the end, there was very little substantive changes and the revenue raisers that will apply like the increase in corporation tax and freezing of the income tax allowance and bands would not apply for more than a year’s time.

Overall therefore, a Budget based on economic recovery with presumably the plan for the tax take to increase later? Part of the fiscal measures being announced is the forthcoming ‘Tax Day’ on 23 March where the government will issue a number of tax consultations. Whilst there has been no announcement about which areas of tax will form part of the consultations, it would seem likely to focus on some of the areas noted in the article below.

For law firms, consultancies, and business advisors, key areas to watch out for will be:

  • The 3 hats problem. Referring to the differing tax position for an employee, the self-employed and those operating through a personal services company, Rishi Sunak may see this as an area of reform commenting last year that the differential is ‘harder to justify inconsistent tax consequences’.
     
  • Operating structures and exit plans. Understanding which is the best structure to operate your business through (company, partnership, hybrid structure, employee ownership trust) becomes increasingly complicated and any future proposals needs to be brought into the equation when looking at the budget changes to for example, the corporation tax increase and the super deduction which only applies to corporates.
     
  • Capital taxes. When compared by some to the tax on labour, this is an area that may well be included for review. In addition to our current capital gains tax and inheritance tax, this may extend to windfall taxes and a further wealth tax, however, the complications and retrospective nature of these areas make them less attractive to introduce.    

For further detail on what might be included, read this article.

Taxes in 2021 – are there rises ahead?

10 December 2020

The Chancellor’s Budget has been announced for 3 March 2021 and it will be his second dominated by COVID-19. The health crisis has changed the economic landscape so much that the Chancellor was not sufficiently confident in his forecasts to hold a Budget in the autumn as we would normally expect, but that has not stopped him making what many see as ominous noises about balancing the books when the pandemic is over. 

With Government borrowing expected to exceed £500bn in this financial year there is clearly a very big issue to solve. A key question will be how long the various forms of lockdown continue in 2021 and how many business and jobs can be preserved until the economy gets back to normal operation. The quicker the lockdown eases, the less damage there will be to the economy and the faster the recovery in Government revenues will be. However, it already seems clear that high Government borrowing is locked in for the medium term – ie become “structural” and an issue that the Chancellor cannot tackle through a return growth in the economy alone in a post-Brexit world. 

What are the options?

Boosting the economic recovery will be the Chancellor’s first priority for the next Budget. We may see more schemes like “Eat out to help out” to get the public spending money again: a scheme for theatres is rumoured. Then we can expected to see a range of schemes and financial incentives for employers to take on employees. Capital investment will also be high on the list and alongside the proposed national infrastructure bank, there are likely to be new tax incentives for owners to invest in their businesses – from enhanced capital allowances to free-ports and maybe new enterprise zones.

While few commentators believe that any significant return to “austerity” is likely, we may well see a significant tightening of Government spending with a public sector pay freeze for higher earning public sector workers outside the NHS already announced. But all these measures are not likely to boost growth of government revenues sufficiently - tax rises seem to be inevitable – at least in the medium term.

So which taxes will rise? The Government has pledged not to increase rates of income tax, VAT nor NIC in this Parliament. Given that these are the biggest revenue raisers for the Treasury, this makes the Chancellor’s job even more difficult!

The Treasury Select Committee review of ‘Tax after Coronavirus’ is expected to report before the March 2021 Budget. Although this is a cross party committee and its recommendations may be politically neutral, the Chancellor will no doubt pick and choose the ideas he wishes to take further. Therefore, it may inform some of tax reforms the Government investigates during 2021 but the Conservatives’ election pledge will probably loom larger in the Chancellor’s thinking.

A new report looking at the viability of introducing a wealth tax in the UK suggests that a one-off tax could raise £260bn. However, although the report is backed by a Government research body, the Chancellor has already said that he does not feel that a wealth tax is appropriate: and the report itself suggests that reforming Inheritance tax and Capital Gains tax would be a simpler option. Reform of IHT has been debated for some time (see our commentary) so it would not be too surprising if we do see changes in future. However, IHT is a very emotive topic for voters any Chancellor would tread very carefully when addressing it.  

Another recent report by the Office of Tax Simplification on Capital Gains tax has led many to believe that higher rates of CGT are on the way as the OTS suggests to remove the distortions that tax system currently creates. Yet even if the Chancellor did raise CGT rates and managed to double the revenue it collects (a somewhat doubtful premise), that would only collect an additional £8bn a year in tax revenue. Personally, I think that dramatic increases in CGT are unlikely for now, particularly for the business community, although some pruning back of existing CGT reliefs is possible. (Read more on the OTS proposals).

Similarly, the cost of higher rate tax relief on pension contributions now looks very high at £40bn a year. Introducing a flat rate of relief at 25% would save £4bn a year according to the Resolution Foundation and it is (yet again) rumoured that the Chancellor is considering the idea – even though it has been politically toxic in the past and would be messy to apply in practice. Such as change would deter pension saving for some. While that is not good for economy in the long term, it that could have a handy short term benefit for the Chancellor if it means more money is spent in the economy or invested directly into businesses.

With climate change seen as the next global crisis, there is the strong possibility of green taxes being stepped up to advance the government’s zero-carbon agenda. Existing taxes on fuel, the carbon price floor and the new plastics tax are could be increased sharply and may be joined by new taxes such as road pricing, frequent flyer taxes and all single use items. And, post-Brexit, it would be possible for the Chancellor to introduce a new higher rate of VAT for environmentally damaging goods and services without breaking the Conservative’s pledge not increase the standard rate of VAT.

It is also possible that taxes on those other harmful substances – salt and sugar, may be introduced as part of a wider post-COVID-19 health campaign. Taxing us for our own good takes the moral high ground – statistics showed that the healthier you are, the less likely you are to get very sick if you catch Covid-19. So like the current ‘sin’ taxes on tobacco and alcohol, salt and sugar taxes could raise some significant revenue for the government in future.   

When will taxes rise?

Unless the Chancellor can persuade his party to drop its election pledge, he is going to have to use at least some of these options and others to raise tax revenue in the medium term. I suspect that change will be gradual and that most of the announcements in the March Budget will be limited consultation documents as part of the normal legislative process for Finance Bill 2022.

However, that doesn’t mean you shouldn’t take advantage of current tax reliefs while you can. If the vaccination campaign is hitting its targets by March and the end of lockdown is in sight, the Chancellor may just feel empowered to prune back some tax reliefs to save money. And I’m certain that, as the economy recovers, we will see the Treasury ‘take back control’ of tax revenues with a range of tax rises and cuts in reliefs. In the long term, I would not be too surprised if securing future tax savings are as dependent on saving carbon and eating healthier as they are on using traditional tax incentives. 

Further BDO Budget commentary

To read more about our Budget predictions and to take part in our poll ‘If you were Chancellor for the day, what would you support?’ please visit: BDO Budget Hub

Business timeline – empowering you to plan ahead

Whilst the uncertainty of future tax changes remain to seen, to help you navigate known key events, tax and legislation changes, please take a look at our interactive timeline. This can help guide you and your business in the decisions you take, to understand these issues and the appropriate strategies you need to put in place to navigate through any challenges and opportunities that these will present.

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