As we count down to the general election in July, be wary of those manifesto promises not to raise tax rates.
The Conservatives and the Labour party are going into the next election with the same key fiscal rule. This states that in five years’ time, total government debt (currently about £2,700 billion) should be falling as a percentage of gross domestic product (GDP), which is broadly how much the UK produces in a year. It is a rolling five-year target, which means the test is purely theoretical, based on economic projections from the Office for Budget Responsibility (OBR).
However, after the election, there is going to be a much more immediate – and real – problem: the new government will need to undertake a Spending Review as the existing Review (2022–2025) ends in April 2025. This is likely to be a painful process – the head of the OBR has described the financial plans outlined by the government for 2025 onwards as worse than ‘a work of fiction’.
With both major parties avoiding discussion of raising tax rates, it may seem the only option is spending cuts to bring finances into balance, but that is not necessarily the case. As the current government has demonstrated with its tax allowance freezes and cuts, increasing tax revenue does not require tax rate rises. Another Exchequer-boosting possibility, which was floated by the Shadow Chancellor, Rachel Reeves, in 2021 is to cut back on tax reliefs. At last count, HMRC said that there were nearly 1,200 tax reliefs in force.
Recently, the Institute for Fiscal Studies (IFS) gave an example of how reforming just three inheritance tax (IHT) reliefs could, in the short term, increase tax receipts by £3.6 billion a year. The trio of changes proposed by the IFS were:
- Abolishing 100% IHT business relief for AIM shares;
- Limiting business and agricultural reliefs to a total of £500,000 per person; and
- Scrapping the IHT exemption currently given to pensions pots on death.
There are plenty of other areas where revising or scrapping tax reliefs could prove rewarding for a cash-strapped Chancellor, but do not expect to see them listed in the forthcoming manifestos.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
Content correct at the time of writing.