It comes as no surprise to hear that the global pandemic has left a rather sizeable hole in the government purse. And, with one of the largest recessions on record, the Chancellor is desperately seeking out ways to claw back the spending that COVID-19 has caused.
Unfortunately, speculation in the press is suggesting that Rishi Sunak and his team are looking to increase taxes in order to offset the deficit. And, worse still, following a difficult year for contractors and upcoming reform to IR35, it could be small business owners and limited company directors who are hit hardest.
This, of course, seems a little unfair—after all, limited company directors received very little government financial support when the virus first took hold. In fact, an entire campaign (called #ForgottenLtd) has been launched to raise awareness around the plight of limited company directors in these testing times. After pressuring the government, #ForgottenLtd has managed to get the issue debated at parliament.
Unfortunately, the conversation seems to have stalled for the moment. And, with the Treasury choosing to scrap the autumn budget in order to focus on the crisis, it is one of many questions that remain unanswered. With the announcement that the Spring Statement will be held on 3rd March, many are speculating on what this budget will bring.
But what exactly will Sunak and his team do to fill the financial hole left by COVID-19? Let’s take a look at some of the most talked-about rumours.
An increase in Capital Gains Tax
There are strong rumours that Capital Gains Tax is going to be increased to be in line with income tax. That means the tax on profits gained by selling assets could rise from 10% to 20% for basic rate taxpayers, and from 20% to 40% for higher rate taxpayers.
Although the government could angle this increase as a way to make taxation fairer (by getting rid of the gap between earned and unearned income), it would doubtless be unpopular with contractors—particular as they would be adversely affected by the move. And remember, the lifetime limit of claims under entrepreneurs relief was only recently reduced from £10m to £1m in April 2020.
An increase in Corporation Tax
According to a report in The Times, Sunak is considering a 5% rise in Corporation Tax. The rise, which would see tax go from 19% to 24%, could raise £12bn in 2021, rising to £17bn in 2023-24.
It’s unlikely that this move would be supported by business leaders, particularly as they desperately try to recover from the financial crash caused by the pandemic. And, once again, with little financial support currently in place, the increase would hit contractors harder than most.
An increase in Dividend Tax
Are you noticing a pattern here? Although not as strongly rumoured as the increases we’ve already discussed, there is some talk that a Dividend Tax increase is on the table. Apparently, the rise would make taxation on dividends closer to that of PAYE (so, from 7.5% to 20%), essentially meaning that contractors would be paying similar tax to employees.
While this tax hike would get some cash back into the government coffers, it would be a particularly difficult pill for contractors and investors to swallow. After receiving virtually no help from the Chancellor, should limited company directors really be the ones to foot the bill for help given to others?
Should you be worried?
Although the paragraphs above don’t make for pretty reading, it is important to remember that, at this stage, it is all speculation and given the pandemic is far from over it seems unlikely that increases will be announced at the budget in March. And, although we’ve looked at changes that could affect limited companies here, it’s just as likely that Sunak could target Employers’ National Insurance or other revenue streams. The treasury could even turn around and hold off any tax rises for the short term future, in order to stimulate spending in the economy.
If the global pandemic has taught us one thing, it’s that even the best-laid plans can change in an instant. So, although it’s important to be up to date on the latest tax developments, it’s equally important to remain calm and confident.
Got any questions?
Of course, if you want financial guidance through these uncertain times, we’re here to help. We can certainly assist you in navigating the choppy waters of a post-pandemic world. Drop us a line to see how we can take some of the financial weight off your shoulders.