Welcome to the new tax year, which starts on Saturday (6 April). Already shaping up to be exceptional in a number of ways, there may be further unexpected shifts in policy before and after the expected autumn general election.
First, key tax rule changes are taking effect, including the effective abolition of the pensions cap known as the lifetime allowance (LTA) and the recently announced reductions in national insurance (NI) rates. On the minus side, capital gains and dividend tax allowances will be ripped in half (again). But 2024-25 may also be the year when time runs out on certain reliefs and allowances, especially those available to higher and additional rate taxpayers, as the state’s requirements for funding continue to rise.
No one is expecting the current tax burden, as heavy as any electorate in living memory has known, to be rolled back. The tax take is expected to be £104bn bigger in 27-28 than in 2018-19.
A pre-election tax giveaway of some sort cannot be ruled out, although with polls predicting a Labour landslide it seems hardly worth it. In any case, a giveaway may not be sensible in the absence of any transformation of the nation’s growth rates. Meanwhile, for many, including a Labour government with different priorities and perspectives, the question isn’t so much about how to cut taxes as where to look next and how to distribute the burden so it falls on those with the highest earnings.
We might moan about food producers cheating us through shrink- and skimpflation but governments do it too – through frozen allowances and dilly-dallying over addressing unfairnesses such as those relating to child benefit payments.
Certainly, the 60 per cent (or 63 per cent if you live in Scotland) tax trap seems likely to remain in place. This is the tax rate that applies to those earning more than £100,000 as a result of the personal allowance taper. Introduced by Alistair Darling 14 years ago, the threshold for this taper has never risen. Just as people are being dragged into the higher-rate tax net thanks to frozen thresholds and inflation-linked pay increases, so some are being stung by this policy. The Institute for Fiscal Studies estimates that between 2012-11 and 2023-24, the share of adults facing a 60/63 per cent marginal tax rate has risen fourfold, while HMRC has confirmed to accountants RSM that the amount of income tax generated by the personal allowance taper rose from £2.6bn in 2018-19 to £4.7bn in 2022-23.
The point is that high rates of tax have become normalised and increasingly, as incomes grow, taxpayers are feeling much less of the benefit.
Nor can higher earners feel comfortable about beneficial tax changes. While tax charges of up to 55 per cent on the portion of a pension pot above £1,073,100 have now been removed, Labour has stated its intention to reinstate the cap. Any changes would need to be reversed through legislation, and in that case, it seems likely that savers in breach of the rule would be granted protection – as was previously the case when the threshold was altered. But the LTA still lives on in other ways, for example, to set limits on the 25 per cent tax-free lump sum and on amounts that can be passed on tax free.
Hunt’s other big pension change in 2023 was to increase the annual allowance from £40,000 to £60,000, and to £10,000 from £4,000 for the highest earners. Incentivising people to save for their retirement is not to be tampered with lightly but a government looking to economise might be tempted. Higher rate relief on pension contributions, described by Gary Smith at Evelyn Partners as the “cat with nine lives”, could be vulnerable.
Meanwhile, the Resolution Foundation is keen on a property tax overhaul. Council tax is going up a lot for almost everyone and will reach a record high as a percentage of GDP in 2024-25, it says, yet this is a tax that is “chronically unfair (eg lowest in the richest parts of the country) and way out of date”.
A high tax-and-spend government would have reasonable public support. In an Ipsos poll last month, 36 per cent of respondents said they would choose to increase spending on public services even if they had to pay more in tax (the figure rose to 51 per cent among 2019 Labour voters), compared to 33 per cent wanting to prioritise cutting the taxes they pay personally, even if it means spending less on public services.
