While the David Bowie/Queen baseline is now going to be stuck in your head for the rest of the day (you’re welcome), it is true that pressure is becoming something we are used to in the current economic climate. Rocketing inflation is putting pressure on employers to up wages, leading to strikes which puts even more pressure on the economy. Politicians are under pressure, some of their own making admittedly, but trying to juggle the needs of businesses, taxpayers, families, refugees and honourable members is a tough job at the best of times and made harder when various groups are pushing for help, for windfall taxes, and for eye-watering payrises that need to be funded out of the public purse.
Of course, said public purse is largely funded through taxation, and the Chancellor has come under fire recently for over-borrowing in times of low interest rates, only to be caught with his proverbial pants down as rates start to rise. But the flip side of borrowing is increased taxation, and on top of rising mortgage costs, energy bills and soaring inflation, it could be said that an added burden of taxation would be simply too much pressure to bear.
That said, some previously announced measures will end up filling Treasury coffers even faster than advertised. The freezing of personal tax rates and allowances was already noted as a kind of stealth tax, with the likely effect of the stagnation quantified by economists. Earlier this year, research by the House of Commons library commissioned by the Liberal Democrats found that by the proposed end of the freeze in 2026, an additional 1.2m people would be pushed into higher rate (40%) tax, with almost 1.5m people whose income is currently too low to pay tax being tipped into the tax net. Factor in a couple of years of high inflation and wage growth and those figures are likely to look paltry in comparison, meaning more and more people will be paying tax at higher rates, while dealing with rising costs. The same research suggested that by 2026, disposable income would fall in real terms by 1%; this is likely to be considerably higher now.
So what can the Chancellor do? Well the new Energy Profits Levy (or windfall tax) will contribute some to the cause, although cynics might argue it was a largely political move to appease the bruised public. Oil companies already pay higher taxes on profits, but an additional levy only bites where there are profits to tax, and relief for capital costs and other investment means that oil companies may not pay as much tax as you might think. The government also rejected claims for windfall taxed initially, arguing that they were bad for business and would make the UK less competitive. Coupled with the UK’s rise in baseline corporation tax to 25% from April 2023, they could have a point.
Of course, one of the biggest contributors to the tax pot is income tax, and the 1.25% increase in National Insurance (definitely not an income tax, but instead a tax on income) will bear fruit in increasing levels over the next few years. Perhaps mindful of the writing on the wall, this increase was not abolished in the Spring mini budget, but the thresholds were aligned with income tax thresholds, with effect from next month, such that it is only those earning broadly more than £40,000 who will be bearing the additional cost. As previously mentioned, however, the number of people falling into this bracket is likely to rise significantly over the next couple of years.
So what does this mean for the scheduled Autumn Budget? Well attempting to balance the need for increased taxes with more money in people’s pockets is not an easy ask, and the Chancellor will be under some pressure to come up with the right kind of solutions that ease the pain, while not stifling business. Good luck…
