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Spending Review 2020: Sobering outlook casts fears tax hikes could be bigger and last longer

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Rouse Partners

Following the Chancellor’s Spending Review speech, the extent of UK borrowing, combined with the impact of Brexit, could lead to larger than expected tax increases.

Economic outlook

  • The government is set to borrow a record £394bn this year, easing down to around £100bn after 2023.
  • Unemployment is expected to rise to 2.6 million by the second quarter of 2021.
  • The economy is predicted to contract by 11.3% and grow by 5.5% next year and 6.6% in 2022.
  • The OBR warned the economy is not expected to return to pre-pandemic levels until the end of 2022.
  • The national living wage will increase to £8.91 per hour and will be expanded to those aged 23 and over. The national minimum wage will also rise.

Government spending

  • Public sector pay will be frozen, except for NHS staff and those earning under £24,000.
  • Spending on overseas aid will be cut from 0.7% to 0.5% of national income next year.
  • £3bn will be made available for a three-year ‘Restart’ project to assist a million people who have been unemployed for over 12 months to find jobs.
  • A “Levelling up” fund worth £4bn will also be created to pay for local projects such as bypasses and museums and galleries, through to street and town centre developments.
  • £7.1bn will be made available for a national home building fund.
  • A new national infrastructure bank will work with the private sector to fund major new investment projects across the UK, beginning in Spring 2021.

What does this mean for tax?

By Oscar Wingham, Tax Partner

Spending reviews aren’t intended to tackle how the government is going to cover its spending commitments, and the Chancellor kept any major changes to fiscal policy under wraps until his Budget, scheduled for the Spring.

However, hidden in the Spending Review was a statement that some income tax allowances and thresholds and national insurance limits will increase in line with the September CPI figure of 0.5%, which is the minimum required by legislation. Therefore, the personal allowance for 2021/22 should be £12,570 (up from £12,500 in 2020/21) and the basic rate limit for 2021/22 should be £37,700 (up from £37,500 in 2020/21). Meanwhile, the National Insurance limits and thresholds for 2021/22 will also follow the September CPI figure increases.

On one hand, the Spending Review demonstrated that the Chancellor is clearly sensitive to the idea that tax increases should not be imposed too early, thereby choking off an all-important economic recovery.

However, on the other side, the clear scale of the 2020/21 coronavirus costs means that tax increases are almost inevitable. It is most likely that we will see the first of these announced in the spring Budget, with tax rate changes likely to take effect from April 2021. With UK borrowing now projected to continue increasing, at least until 2025/26 even with vaccination programmes anticipated, this suggests further tax increases can be expected in April 2022.

Whilst Europe and Brexit were not specifically mentioned in the Spending Review, the longer, deeper borrowing curve implies that the UK will face a far greater fiscal crisis.

This precarious outlook means that the widely expected tax rises many be bigger and may continue for longer than had previously been expected. Will these be applied widely in the personal or corporate arenas, or targeted within the long rumoured tightening of CGT and IHT regimes? This will become clearer in the Spring.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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