The Lemon Fool

I'm not sure if this is the right place for this post.

Being in the Scottish tax regime I have seen my tax threshold fixed for several years and my higher rate going to 41%, so I know what even mildly punitive tax changes can do to a monthly pension income.

I have an uneasy feeling that tax rates could rise after we come through this episode.

My feeling is that the 41% rate could go to say 50% by year end after the enormity of the recent spend sinks in.

Am I being too pessimistic and could I have your opinions on possible revised tax thresholds, in the context of the UK as a whole.

Thanks

scotview wrote:I'm not sure if this is the right place for this post.

Being in the Scottish tax regime I have seen my tax threshold fixed for several years and my higher rate going to 41%, so I know what even mildly punitive tax changes can do to a monthly pension income.

I have an uneasy feeling that tax rates could rise after we come through this episode.

My feeling is that the 41% rate could go to say 50% by year end after the enormity of the recent spend sinks in.

Am I being too pessimistic and could I have your opinions on possible revised tax thresholds, in the context of the UK as a whole.

Thanks

The government is borrowing at extremely low interest rates which are fixed for a long period - a few years ago the average duration of UK gilts was over 14 years and I think it has probably increased since then. Hence there shouldn't be much need for the government to raise taxes in the short term to cover this increased debt. What happens in the longer term will depend upon how much the debt has been inflated away (ie the inflation rate over the period) combined with what interest rate the government has to pay when it wants to roll-over this debt.

I've also thought tax rates will go up after, cause although the debt doesn't need repaying, there will be a substantial increase in the servicing of the national debt through interest.

Rather than increasing income tax rates, I think more likely is 1. remove higher rate tax relief on pensions, as that was mooted anyway, 2. increase national insurance rates, as most people don't understand this, 3. align capital gains tax rates with income tax, as low CGT benefits mainly the richest.

Certainly the first, the other two are less politically risky than raising income tax, but will bring in a lot of income.

The Chancellor has already strongly hinted that he thinks it fair to align tax on the self employed with that on the employed.

Pensions tax is a minefield (see the problems they had with Medics refusing overtime or retiring early because of the ultra high rates that resulted from pensions taxation). The simplest thing he could do would be to limit the tax free lump sum.

I think any tax rises will be moderate because he won't want to do anything to inhibit the economic recovery and also every other western country will have had soaring borrowings so the comparative position of UK public debt will not have changed.

fca2019 wrote:I've also thought tax rates will go up after, cause although the debt doesn't need repaying, there will be a substantial increase in the servicing of the national debt through interest.

Rather than increasing income tax rates, I think more likely is 1. remove higher rate tax relief on pensions, as that was mooted anyway, 2. increase national insurance rates, as most people don't understand this, 3. align capital gains tax rates with income tax, as low CGT benefits mainly the richest.

Certainly the first, the other two are less politically risky than raising income tax, but will bring in a lot of income.

In 2019 the interest on the national debt was 2.28% of GDP which historically is pretty low. During the 1980s it peaked at 4.56% of GDP and never got below 3.02% of GDP. Apart from the Blair/Brown years you would have to go back to 1915 to find a lower interest/GDP rate (2.08% of GDP).

see

https://www.ukpublicspending.co.uk/spending_chart_1914_2019UKp_17c1li011tcn_90t

So assuming the UK's GDP isn't permanently depressed by coronavirus (and brexit) then there shouldn't be too much to worry about with the interest payments.

ursaminortaur wrote:
So assuming the UK's GDP isn't permanently depressed by coronavirus (and brexit) then there shouldn't be too much to worry about with the interest payments.

But we already know that UK GDP has been depressed due to the front-shock of Brexit, and we are not even 'out' yet in trading terms. Add in CV19 and it looks even messier. Knowing that other ships also have holes might make one feel in company, but in this case global economics will tend to be magnified in the more open trading nations. Like the UK.

regards, dspp

dspp wrote:

ursaminortaur wrote:
So assuming the UK's GDP isn't permanently depressed by coronavirus (and brexit) then there shouldn't be too much to worry about with the interest payments.

But we already know that UK GDP has been depressed due to the front-shock of Brexit, and we are not even 'out' yet in trading terms. Add in CV19 and it looks even messier. Knowing that other ships also have holes might make one feel in company, but in this case global economics will tend to be magnified in the more open trading nations. Like the UK.

regards, dspp

Yes that is why I added in the caveat about brexit. I doubt Coronavirus would have a long term impact on the UK's GDP on its own but I'm a lot more concerned about brexit's effects. And although other countries in the EU will also be affected by brexit the impact on the UK's economy will be worse.

I have no doubt that the COVID19 situation added to the impact of Brexit will result in the Chancellor needing a lot more money in his coffers. The hundreds of billions being doled out to all & sundry as though it is confetti in the current situation to enable them to spend their days watching Netflix has got to be paid for somehow. To repeat one of Theresa May's favourite mantras there is no magic money tree.

As others have suggested it may not come from direct income tax increases, though that it is a possibility, but is more likely to come about from stealth taxes, reductions in allowances, not increasing tax band amounts in line with inflation etc.

It's unfortunate you're in Scotland from the tax perspective because the government there is particularly anti-business and pro-handouts to those who don't want to work etc. For instance, they've clamped down hard on property construction in the current situation. Therefore higher earners are likely to be whopped slightly harder than in England in the post-Coronavirus world.

A lot depends on where the economy ends up after the process of lockdown has faded in impact. The government's finances are linked to the GDP. If the GDP goes down by 10% the government deficit goes up by about 3% of GDP.

johnhemming wrote:A lot depends on where the economy ends up after the process of lockdown has faded in impact. The government's finances are linked to the GDP. If the GDP goes down by 10% the government deficit goes up by about 3% of GDP.

The problem for the UK is that even if covid-19 becomes less of a problem later this year so that only this year's GDP takes a hit from it the UK, as currently planned, then faces what looks to be a very hard adjustment in January as we exit the brexit transition period.

Although I don't think Brexit helps, it is trivial in comparison to the effects of the lockdown.

I'd say now another month has past CV19 has been lot worse than expected and the govt support more extensive so tax rises more likely.

I'd say a conservative govt unlikely to go for a wealthy tax, or after peoples houses or pensions. I'd say the more like is the low hanging fruit:- income tax at 50% for high earners, higher rate tax relief on pensions going, taxing lifetime gifts, higher corporation tax.

Basically some of the labour plans, which the govt could do politically and not wreak havoc on the economy.

fca2019 wrote:I'd say now another month has past CV19 has been lot worse than expected and the govt support more extensive so tax rises more likely.

I'd say a conservative govt unlikely to go for a wealthy tax, or after peoples houses or pensions. I'd say the more like is the low hanging fruit:- income tax at 50% for high earners, higher rate tax relief on pensions going, taxing lifetime gifts, higher corporation tax.

Basically some of the labour plans, which the govt could do politically and not wreak havoc on the economy.

Er, how is that "unlikely to go for...pensions"?

The other argument is that the Chancellor ought to leave taxes alone for the next year or two because the last think the economy will need is higher taxes whilst it is hopefully in recovery mode.

Dod

dealtn wrote:how is that "unlikely to go for...pensions"?

Just my guess, in that the conservatives made a big thing, quite rightly, of Gordon Brown's pension stealth taxes which ended final salary schemes for the private sector.

fca2019 wrote:

dealtn wrote:how is that "unlikely to go for...pensions"?

Just my guess, in that the conservatives made a big thing, quite rightly, of Gordon Brown's pension stealth taxes which ended final salary schemes for the private sector.

They did, and then they never repealed that when they retook power. In fact they made them worse.

No politicians can be trusted when it comes to taxes. Which is why we need something like the "no tax rises" pledge that all US Republicans have to sign if they want to get elected.

Dod101 wrote:The other argument is that the Chancellor ought to leave taxes alone for the next year or two because the last think the economy will need is higher taxes whilst it is hopefully in recovery mode.

I can see that, but tax take is going to be down. Even though interest rates are low, the interest on £2 trillion is large, and growing continuously. So I think stealth taxes are on their way!

fca2019 wrote:

dealtn wrote:how is that "unlikely to go for...pensions"?

Just my guess, in that the conservatives made a big thing, quite rightly, of Gordon Brown's pension stealth taxes which ended final salary schemes for the private sector.

I think you're missing my point!

You said "...conservative government unlikely to go for ... pensions" and then "I'd say ... higher rate tax relief on pensions going".

How is that consistent? Your "more likely" is a tax on pensions, which you had previously thought unlikely!

The economic outcome of lockdown is not yet clear. Potentially we could bounce back a long way, but if we dont the possible outcomes include a much more challenging problem than from 2008. Hence any changes are potentially more severe than many of the relatively peripheral changes we have seen.