The writer is editor-in-chief of MoneyWeek
You might have been tempted to feel a bit relieved when Rishi Sunak had finished delivering his budget on Wednesday.
The last week has been jammed full of warnings that the largesse of the Covid-19 era was going to have to be paid for. The bill might come in the form of a nasty hike to capital gains tax rates, a new wealth tax, the long-threatened restructuring of pension tax relief, a rise in income taxes or something equally upsetting.
But none of these things has come to pass. Instead, there are just to be some freezes to a few allowances that not everyone understands particularly well in the coming year (to the inheritance tax allowance, the capital gains allowance and the pension lifetime allowance). There will also be freezes to the allowances that we do all understand — but not quite yet. Personal allowances for income tax will be raised in line with the Consumer Price Index in 2021/22 (to £12,570 and £50,270), and then stay there until 2026.
All of which sounds pretty harmless, doesn’t it? It isn’t. Take a look, first of all, at income tax. If inflation were to rise to 2.5 per cent a year over the four years of the freeze, says Steven Cameron, pensions director at Aegon, then someone on a salary of £60,000 would end up paying a total of £3,312 more in income tax than they would have done, had the allowance risen with CPI (as it was supposed to). The higher inflation rises, the higher the effective bill for the income tax payer — in both real and nominal terms.
Finally, of course, the number of people falling into each bracket will rise as the years go by: according to wealth management group Tilney, around 800,000 people who would not otherwise have been taxpayers will find themselves earning more than the basic rate band by the scheduled end of this parliament. Another 800,000 earners will find that they are higher rate payers. All in all, over the next five years, the Treasury expects to raise £19.3bn from the income tax allowance freezes. That’s real money. An awful lot of people will feel oddly poorer soon — and they will not be quite sure why.
Then look to the other freezes. You might be pleased that Sunak recognises that introducing some kind of annual wealth tax is a logistical nightmare — and isn’t doing it (yet . . .). But let’s not forget that capital gains tax is in many ways a wealth tax in the UK. It isn’t indexed to inflation, so you can easily end up paying tax on nominal gains if you have held an asset for many years, for example — and the longer the nil-band allowance fails to rise with inflation, the more that risk rises.
Inheritance tax is also an obvious wealth tax. You can argue that it is unearned wealth for the heirs, so it’s hardly a tax they can get much moral traction in complaining about. But it still transfers wealth from individuals to the Treasury — £6bn of wealth this year, according to Treasury forecasts. The longer the freeze goes on, the higher that number will rise.
On to the LTA. This is also a wealth tax of sorts (it makes savers liable for a tax surcharge on assets over £1,073,100 when they cash in their pension assets — enough to give up a not exactly lap-of-luxury income of around £26,000 a year if swapped for a regular income in the form of an annuity). The more your assets grow, the more you will pay. It’s worth noting that the LTA also works as a very obvious tax on those with defined benefit pensions. Their liabilities are calculated differently (and much more generously), but nonetheless reductions in the LTA have in the past been linked to many NHS doctors deciding to retire or part-retire early.
The UK might not have a tax specifically labelled as a wealth tax, but we have no shortage of quite high — and now rising — wealth taxes. You could list a few compensations — there is the cut to stamp duty, the new 95 per cent mortgage guarantee and the promise of being able to buy green bonds via a state-owned savings bank, NS&I.
But none of these measures offers much actual compensation. The first two just add to the miseries of the UK housing market — making prices even more unaffordable in historical terms, and encouraging young people to take out too much debt at a time when its cost can only rise. And the latter will be pointless: if the government can raise cheap money elsewhere, why would it pay the UK’s savers over the odds for money? Quite.
The key point for all taxpayers to take away from this budget, then, is not that they got away lightly but, with the UK tax burden set to rise to a 60 year high, that they did not.
Almost all of the taxes that affect our income and our wealth are set to rise substantially in real terms — as, by the way, are the penalties we will be hit with if we don’t pay up on time. How much they rise is simply a function of how much inflation rises over the next five years. Sunak has the look of someone putting in place policies that will help him out if the answer to the how much will inflation rise question is “quite a lot”.