Almost four months into the new Labour government, much uncertainty remains about its future tax policy and its attitude towards business.
But could next week’s Budget finally provide the clarity we’ve been waiting for on key areas like national insurance, pensions and the cost of doing business?
Some things are already known for certain. The government’s manifesto pledged not to increase taxes on working people, ruling out hikes in income tax and employees’ national insurance contributions (NICs). It also ruled out increasing VAT, although it plans to extend it to private school fees.
Meanwhile, at the recent international investment summit, chancellor Rachel Reeves confirmed the current main corporation tax rate of 25% will remain throughout this Parliament. Additionally, the ‘full expensing’ regime for capital expenditure and the annual investment allowance for the first £1 million in certain expenditures will also stay.
Nonetheless, the government has been clear from the outset that it will have to make “difficult choices”, so where will these be felt?
It has been careful not to commit to retaining employers’ NICs at the current level of 13.8% leading to significant speculation it will increase and/or be extended to employer pension contributions.
The tax relief on pensions has also been a hot topic including the potential abolition of tax relief at the higher rate of income tax and the ability to take a tax-free lump sum of up to 25% from a pension pot.
From a business-owner’s perspective, capital gains tax (CGT) and inheritance tax (IHT) will be at the forefront of the mind.
A case could be made for increasing the main rate of CGT, currently 20% (other than for residential property), towards income tax rates (current higher rate 40%). Depending on the level of any increase, however, this could actually yield a reduced overall tax take, as there may be no strict requirement for an individual to make a capital disposal.
However, the CGT base cost uplift (to market value at date of death) can also provide significant tax savings, and it wouldn’t be surprising if the Chancellor takes a closer look.
If removed, the beneficiary (if they chose to sell the asset) would pay CGT on the difference between the value received on sale and the original base cost to the deceased. Such base cost might be significantly lower than the market value at time of death, thus giving rise to a material CGT charge.
For IHT, there is speculation that business reliefs on qualifying assets might be amended. This could have a notable impact, as the main IHT rate is 40 per cent.
Whatever is in store, the Budget will finally provide the clarity on the future tax landscape that business needs and – as it always has – it will adapt to the rest.
- Mark Hood is a partner and head of tax advisory services at HNH in Belfast.
