For the past three or four months, everyone’s focus has been rightly on getting by day-to-day and managing the health crisis. As we begin to move past the peak of the pandemic, attention is now shifting to the economy, which means tax increases are back on the table.
Right now, we don’t know much but we do know the economy is in pretty bad shape. There’s a lot of talk about what to do next, but it is unlikely we’ll see much clear guidance on controlling the deficit for a few months. At the moment we know the deficit is standing at around £2 trillion – that’s a 13-figure sum! So, some drastic measures are likely to be required to control it.
Taxes can have a huge impact on all our finances so it’s important to understand what’s going on with them. In this post I’ll aim to give an overview of what’s happened before, what’s likely to happen this time and what it means for you.
Learning from the past
Judging by previous examples of economic crashes, it’s likely the market hasn’t bottomed out yet and sadly the worst is yet to come. Crashes are notoriously long and painful. For example, while we talk about the 2007 Global Financial Crisis, the market didn’t actually bottom out until 9th March 2009.
With the furlough scheme still in place, which has hopefully saved thousands if not millions of jobs, it’s still hard to get a full picture of the unemployment rate. However, Bloomberg has predicted that 25 percent of those on furlough may be unemployed by the Autumn. This suggests that, much like previous crashes, we won’t know the full extent of the economic damage for a while yet.
After the 2007 GFC, the UK government embarked on a policy of austerity. The national purse was squeezed, and a lot of public services saw their funding slashed. While, being fiscally responsible is important for all countries, this tends to make life harder for the poorest members of society and those who rely on public services. After a decade of pursuing this policy, albeit with success in diminishing the deficit, it is unlikely the government will look to do something similar so soon.
What’s happening now
Public opinion has shifted hugely too in the past 10 years. A recent YouGov poll conducted on behalf of Times Radio (which only launched on Monday!) found that 47 percent of UK adults now support ‘mainly tax rises’ for controlling the deficit, while just 30 percent supported this approach in December 2009.
Conversely, over half (52 percent) supported public spending cuts in 2009, while just 27 percent support them now.
In line with public opinion, Prime Minister Boris Johnson has promised to “build, build, build”. Public works projects like HS2 are powering ahead and £5 billion promised to schools, hospitals and roads for construction projects, suggests the government, wants to boost the economy by spending.
In the past, cutting VAT has been used to stimulate spending. This was the case in 2008, when Alistair Darling, the former Chancellor, cut VAT to 15 percent. While Rishi Sunak is said to be considering similar action, it seems like it wouldn’t be as beneficial, at least right now, as the majority of people are currently not spending because things aren’t open, rather than items being too expensive.
This leaves tax increases as inevitable.
So, what does this mean for you and your taxes?
Whatever form tax rises take, the burden will be felt by you, the taxpayer and consumer. Sadly, this means it is likely we will all take home less money each month after taxes, bills and essential expenses.
For young people this can feel frustrating, because you may not feel you’re benefitting from an increase in public expenditure – although if any of it is spent on the tube, I think we’d all be very happy! – and your paycheque may already not be going quite as far as you would like.
But you don’t need to worry too much, increases to things like income taxes will likely be minimal for the basic rate (up to £50,000 a year), as it’s important to make sure consumers still have spending power.
Public opinion seems to point towards some form of wealth tax, although it would be unusual for a Conservative government to introduce this. Therefore, it is best to be prepared for all eventualities and take control of your finances now before it’s too late.
What should I do now?
Taking home less money each month is never ideal, particularly if you’re trying to save for a big purchase. Therefore, it’s important to be smarter with your investments and savings. Interest rates on savings accounts are low at the moment, but it’s worth shopping around for the best rates and incentives available.
Now could also be a good time to consider your other expenditures. Check out these tips to maximise your Covid-hit income, which could help you reduce your expenses and maximise your take-home pay.
Make sure you’re tax efficient
Make use of your full ISA allowance (currently £20,000 a year). If you have a Stocks and Shares ISA you won’t have to pay Capital Gains Tax on any returns or dividends you earn, which could save you a substantial amount.
Without an ISA, you’re entitled to a £2,000 dividend tax-free allowance, which could be beneficial to take advantage of. After £2,000, you pay an incremental tax based on which income tax bracket you’re in.
Make sure you’re fully compliant with HMRC
Another way HMRC will look to increase its tax receipts will be by cracking down on tax evasion and avoidance. This shouldn’t be a problem for most people, especially if you’re tax comes straight out of your paycheque. However, if you make any form of extra income from a side hustle, you may owe tax.
Currently, your first £1,000 of self-employment income or from a rental property is tax free. If you earn over this, you must declare this income and pay any tax you owe or you could face harsh penalties from the taxman.
If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences, especially about tax and public expenditure, so please do leave a comment!