The four major tax levers Rishi Sunak could pull – and how much they would cost you

Jessica Beard
·6-min read
tax rises
tax rises

Chancellor Rishi Sunak has warned the country that taxes will need to rise to pay for the cost of the pandemic.

The Conservatives have promised not to raise income tax rates or National Insurance, but Mr Sunak has several other ways of generating more tax revenue.

Pension savers, investors and landlords could all be hit increased levies in the Budget statement, which will be unveiled shortly after 12.30pm on Wednesday afternoon.

What levers could the Chancellor pull during the statement, and how much will it cost taxpayers?

Lever 1: income and capital gains tax

There will be no changes to income tax rates, a commitment made in the Conservatives' 2019 manifesto. However, the £12,500 personal allowance for income tax was due to rise in the new tax year, but rumoured plans to freeze that threshold could raise an extra £6bn.

Commentators have said it would be a neat way of raising extra funding as would go under the radar largely unnoticed and therefore can be viewed as a "stealth tax". A freeze would affect all workers earning more than the personal allowance.

A review from the Government’s own tax adviser, commissioned by the Chancellor himself, suggested upping rates and slashing protections on capital gains taxes due on investment profits, including from second home sales.

Today CGT raises less than £10bn. The main rates are currently 20pc on most assets and 28pc for residential property that is not the main home. Upping rates in line with income taxes would raise £14bn a year for the Treasury, the Office of Tax Simplification calculated.

It would mean higher-rate taxpayers paying double the amount they do today in many cases, or even more if combined with a reduction in the tax-free allowance.

How much would this cost?

Someone making a gain of £20,000 in the stock market today would pay £1,540 in CGT. But they would pay £3,080 if the rate went up to 40pc. They would pay £6,400 if a rate rise were combined with a reduction in £12,300 the tax-free allowance to £4,000, as an example.

A £100,000 gain from an investment property would be hit with a £38,400 bill – almost £14,000 than they would pay under the current system. The OTS did not recommend how far to reduce the exempt amount.

Cutting the annual allowance to £5,000 would double the number of people forced to pay the toll by 2021-22. Three times as many would pay if the bar was set even lower at £1,000, assuming no change in taxpayer behaviour.

Income tax band freezes would cost families an extra £250 a year by 2024.

Lever 2: pensions allowances

Wealthy pension savers are under threat in the Budget as the Chancellor is expected to freeze the threshold for the pensions “lifetime allowance”, which places a limit on how much savers can put into pension pots tax free. The stealth tax would freeze the limit at its current level – £1,073,100 – until 2024.

Anyone with more than the limit in their pension pot could be hit with punitive tax charges of up to 55pc. Over 290,000 workers already have pension wealth above the lifetime allowance but have not triggered the tax charge.

The charge is 55pc on savings above the allowance if taken as a lump sum or 25pc if taken as an income. Savers will also have to pay tax at the marginal rate on their income. The lifetime allowance should be £76,000 higher by 2025, based on the Office for Budget Responsibility’s inflation forecasts.

How much would this cost?

Tom Selby, of fund shop AJ Bell, said if allowances rose in line with inflation someone could save an extra £76,000 tax-free, including £19,000 of tax-free cash.

However, if the threshold remained stuck at the current level, as is planned, then the additional pension savings would cost £41,800 more in tax charges if the excess was taken as a lump sum. If taken as an income, pension savers would be charged an extra £19,000 in tax.

Lever 3: Stamp duty and council tax

The Government looks set to continue to take a hit on its stamp duty income. Mr Sunak is reportedly planning a three-month extension of the stamp duty holiday in England and Northern Ireland.

This could take one of two forms. If the three-month extension is extended to all transactions, property website Rightmove estimates an additional 300,000 sales in England will benefit from tax savings totalling £1.75 billion.

But extending the tax break to all sales will not prevent a cliff edge in demand when the holiday ends, it will simply delay it until June.

Mr Sunak may therefore opt to only extend the holiday for sales that are already in progress. This option means 234,000 buyers would benefit from savings totalling nearly £1bn, according to property website Zoopla.

But the Government is likely to take some of the lost income from other parts of the property market.

Plans to raise corporation tax would affect the 229,000 landlords who own buy-to-let properties in limited companies.

Other mooted reforms to property taxes include an overhaul of council tax, which is considered wildly outdated.

How much would this cost?

A rise in corporation tax from from 19pc to 24pc would raise about £16.5bn overall for the Treasury. For limited company landlords, the annual tax bill per average £190,000 property would increase by £255 to £1,223, according to analysis by Hamptons International estate agents.

Elsewhere, campaign group Fairer Share has proposed abolishing stamp duty and council tax altogether and replacing both with a proportional property tax, charging homeowners an annual tax equivalent to 0.48pc of their property’s value.

This would save 19 million households an average of £435 per year. But homeowners in the more expensive parts of the country would see their bills jump. Any rise would initially be capped at £1,200 per year, but this would lift when the property was sold.

This policy would be revenue neutral for the Government, but would fit in with its levelling up agenda. But it is highly unlikely that Mr Sunak would opt to alienate the Conservatives’ core voter base in the south.

Lever 4: VAT

The Treasury cut the value added tax customers paid for restaurants, hotels and attractions from 20pc to 5pc last year. In its current form, this cut will run until March 31.

However, while some firms like Pret, Nando's and Wetherspoon did cut prices, companies were not required to. Some have instead kept prices at pre-pandemic levels while using the tax cut to bolster profits. The restaurants and pubs that have already passed on the cut could potentially put prices back up if the tax cut is not extended beyond March.

How much would this cost?

The Government estimated that this could save households an average of £160 a year if the tax break is extended and firms pass the reduction onto consumers.