In the midst of the ongoing cost of living crisis and soaring inflation, the new Prime Minister is getting to work and her new Chancellor will no doubt deliver a budget in the coming weeks.
Whilst freezes to energy bills have been announced, tax has been a prominent point of discussion in the leadership race, and there is a real urgency for the government to take action as the taxpayer is squeezed between a combination of skyrocketing energy bills, inflation and the National Insurance rise introduced earlier this year.
Here are some of the key things we at Claritas Tax believe that the new leader and their Chancellor should consider.
- The country, and indeed the world, is in a totally different place to in March 2021 when then-Chancellor Rishi Sunak announced freezes until 2026 of the personal allowance and higher rate income tax band. Given the historic rate of inflation, this ‘stealth tax’ will likely generate far more revenue for the Treasury than initially anticipated as millions are likely to either be pushed into the higher rate taxpayer bracket or will start paying basic rate income tax above the personal allowance threshold. Reversing that policy would be an effective way of putting much-needed cash back into the taxpayer’s pocket in the short-term.
- The Energy Profits Levy was announced in May 2022 and is expected to raise around £5bn to fund cost of living measuAres. The one-off £400 payment for each household to deal with rising energy costs is unlikely to scratch the surface. Whether there is appetite for a Conservative government to go further with a Windfall Tax on energy companies remains to be seen, but it remains a potential lever to pull in the short-term.
- Both candidates have put forward proposals for reducing VAT. Liz Truss proposed reducing the main rate of VAT from 20% to as low as 15%, whereas Mr Sunak considered cutting VAT on energy bills. Whilst a potentially headline-grabbing move, cutting VAT might not be as effective as a short-term solution to the cost-of-living crisis, particularly for lower-income households who generally spend a larger proportion of their income on goods which are already VAT exempt. Furthermore, the taxpayer is reliant on businesses passing the saving on.
- The vast majority of the focus of the cost-of-living crisis has been on individuals and families, but businesses will also suffer from crippling increases to their overheads and other expenses. Corporation tax is set to rise in April 2023 by 6 percentage points to 25% for companies with profits over £250,000, and whether or not to pursue this plan could be a key decision. The rise was initially announced as part of the measures to recover the costs of the pandemic, but with a recession almost inevitable, heaping more pressure on businesses could be unpalatable when the economy is in greater need of stimulation.
The energy price cap announcements make for grim reading, and many people need financial support imminently. However, the prospect of recession looms large and will require a longer-term strategic plan. Even with the pandemic barely in the rear-view mirror and the 2007/2008 financial crisis still fresh in the memory, the new Prime Minister and Chancellor look set to face the greatest economic conundrum for a generation.