As next week’s Spring Statement draws nearer, the Chancellor will have begun to mull over how to pay for rising borrowing costs in the face of crunches to consumers’ balance sheets.
Will the Chancellor press on with contentious hikes to ‘stealth taxes’, or will he turn his eye to wealth in the form of capital gains and inheritance tax adjustments?
Dividend tax
The Chancellor plans to plug some of the gap in government coffers by tempering high incomes during Covid through a 1.25 percentage point hike on dividends taxes.
“For income investors, the increase in dividend tax is going to hurt at a time when many people will be cherishing dividends even more, to help plug the cost-of-living crisis,” said Myron Jobson of interactive investor.
Laura Suter head of personal finance at AJ Bell, suspects the Chancellor could also cut the threshold for payment of dividends, from the current £2,000 cut-off to £1,000 or even £500, in order to raise further money from the less contentious income tax.
Income investors may find less value in investing in dividend-paying shares like Evraz PLC (LSE:EVR), Rio Tinto PLC (LSE:RIO) and BHP Group Limited (LSE:BHP) if the rise goes ahead.
National Insurance
The Chancellor is facing calls to abandon his planned manifesto-busting pledge to hike national insurance, also set to rise 1.25 percentage points in April, likely to add to a consumer squeeze in the face of rising energy prices.
“Everyone who pays NI will take a hit, but for those whose finances are on a knife edge, this could be a devastating blow,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
National Insurance hikes could affect the shares of high-employing companies that will see their margins cut, including Royal Mail PLC (LSE:RMG) which is dealing with its own pay pressures, and in consumer brands as workers have less to spend on discretionary purposes.
Capital Gains Tax
Generating £10.6bn last year, some feel the Chancellor may opt to slash the threshold for capital gains tax, having previously frozen it until 2026.
According to the Office for Tax Simplification, halving the threshold to £6,000, from its current rate of £12,300, would generate £480mln in additional tax revenue.
Property companies could be expected to feel some pinch from any lowering to the cut-off, though continued flat CGT would be a boon in a year where house prices exhibited double-digit growth.
‘Death’ taxes
A lasting legacy of Covid has been the inevitably high death rate among the older population, and in turn the level of inheritance likely to have gone into UK residents’ pockets. The chancellor may wish to tax that in two ways, the first being the tax charged on pensions passed down to recipients.
“Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not,” said Suter.
Secondly, long contentious inheritance tax could also rise, either through an increase to the current 40% rate, or by lowering the threshold at which repayment is made.
Receipts have been flat in the last four years while the rate of deaths resulting in a charge has fallen, in line with the introduction of the Residence Nil-Rate in 2017.