Reasons Why UK Tax Will Have To Rise

21.07.09

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Will you find that you have to contribute more of your hard earned money to the government to help it reduce its fiscal deficit and pay for its social welfare commitments, particularly the escalat

Will you find that you have to contribute more of your hard earned money to the government to help it reduce its fiscal deficit and pay for its social welfare commitments, particularly the escalating costs of caring for the elderly? While this article covers UK issues, it is likely we will see a similar trend in other countries.

A leading UK think tank, the Centre for Economics and Business Research (CEBR), forecasts that the next government will need to hike taxes and cut spending to the tune of ?100 billion to correct the fiscal deficit.

If, as the bookmakers expect, the new government is Conservative, the forecasts suggest tax rises of ?20 billion and spending cuts of ?80 billion. If Labour is re-elected, the mix is more likely to be ?40 billion of tax rises and ?60 billion of spending cuts.

The figures assume that the incoming government will need to get the budget deficit down to ?50 billion by 2014/15. Without fiscal action, CEBR predicts a deficit of ?158 billion in that year because of sluggish growth, which in turn relates to low tax revenue and a boost in unemployment benefit.

Ratings agency Standard & Poor?s has warned that unless drastic steps are taken the UK?s public sector debt could quadruple by 2050, from currently 50% to 200%, as the costs of pensions, social security and healthcare balloon. Two years ago Standard & Poor?s calculated that the ageing population could increase the UK?s net debt to above 150% by 2050 but the financial crisis has boosted that estimate.

Indeed, according to the Daily Telegraph, the government will have to fork out more in social security benefits this year than it takes in income tax. Projected social security benefits for 2009/10 are ?164.7 billion whereas the Treasury expects only ?140.5 billion in gross income tax. The Treasury forecasts that for 2010/11 the cost of benefits will jump to ?170.9 billion.

An extra retirement tax?

In previous articles I have commented that governments will need to increase tax, in one way or another, to help cover care costs for the growing retired population. Now the UK Government has published a Green Paper to consider how to raise the money needed to pay for home care in old age so that people do not have to sell their homes to fund their stay in care homes.

One proposal is a compulsory state insurance scheme under which everyone who can afford it pays between ?17,000 and ?20,000. Another option is a voluntary insurance scheme where the Government would pay a proportion and where individuals pay an estimated ?20,000 to ?25,000 at today?s prices.

Prior to the Green Paper, it was thought that there would be an increase in National Insurance contributions where every employee would have to contribute, with higher earners paying more. Liberal Democrat Treasury spokesman, Vince Cable, described this as ?an income tax rise by another name?. NI contributions are already due to rise by 0.5% in 2011 to help plug the hole in public finances.

Over the next 20 years the Government estimates that an extra 1.7 million people will need social care at a cost of ?6 billion. Average life expectancy today is 78 years. The number of people over 65 now outnumbers the under-18s and the ratio of people in work at 4:1, will fall to about 2:1 by 2050, meaning there will be even fewer earners contributing to care for the elderly and therefore, logically, the contributive costs will increase.

However the Government decides to finance home care costs, it will take many years for the fund to grow and bear fruit. In the meantime the Government will have to continue to finance those who do not pay for themselves putting the pressure on for more tax increases.

Perhaps the Treasury will find some of this extra tax from targeting landlords. There are proposals afoot to force property letting agents to hand over to HM Revenue & Customs (HMRC) the names and addresses of all landlords they have ever had on their books. From this HMRC could identify and pursue those landlords who have not declared and paid income and capital gains tax.

The economic downfall has resulted in low tax revenue due to a slow economy. The UK Treasury has seen tax receipts fall by ?22 billion over the last 12 months – increasing the likelihood of tax rises and spending cuts. According to the National Audit Office, the downturn cost the Exchequer up to ?32 billion last year.

There has been less tax received in stamp duty from a depleted housing market; less inheritance tax from dropped house values; a VAT reduction to 15% from 17.5%, a drop in income tax from City bonuses and minimal tax from low bank interest. It is all adding to the mounting pressure to do what just about all taxpayers already know and dread ? increase taxes to redress the balance of the UK?s finances.

Chancellor, Alistair Darling said that he would have to borrow ?175 billion this tax year due to falling tax revenues. In 2010/11 borrowing will be ?173 billion and, overall, Darling said he would have to borrow ?703 billion over five years. Every ?100 billion borrowed would cost each UK household ?4,000 in tax.

There is also interest to be paid on national debt, funded by the taxpayer. For 2009/10 the Government will pay around ?30 billion in debt interest. In 2010/11 interest on the national debt will cost taxpayers over ?42 billion – more than the annual budget for the Ministry of Defence, set at ?36.7 billion for next year. Debt interest payments are estimated to be ?58 billion by 2013.

HMRC predicts that the recession will slash the number of higher rate taxpayers by one million in two years, with a corresponding drop in income tax of ?16 billion. These figures are based on higher rate taxpayers paying tax at 40% on annual income over ?37,400. An expected exodus of higher rate taxpayers trying to escape the 50% tax on those earning over ?150,000 from next year means that tax receipts from this income group is likely to be lower than anticipated – and any loss will probably have to be made up from further tax hikes.

If you are concerned about tax rises diminishing your income and eating into your wealth, leaving you less to spend on your own needs, then talk to an established financial adviser from Blevins Franks who can explain legitimate tax mitigating structures that can protect your future finances. This relates both to countries like Spain, France, Portugal and Cyprus as well as the UK. If you are currently an expatriate but for some reason you decide to return to live in Britain, it is best to look into your tax situation before you leave as you may be able to structure your assts in a more tax efficient manner than if you waited until you were UK resident.

By Bill Blevins, Managing Director, Blevins Franks

20th July 2009

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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