Budget 2021 – What might we see?
When Rishi Sunak presents the Autumn Budget and Spending Review on the 27th October, he’s going to have a difficult task on his hands. Manifesto pledges around tax levels and ‘levelling up’ will directly conflict with increased spending on public services and an economy that’s smaller than pre-pandemic forecasts.
A range of expert bodies are already speculating on what he may announce, and are offering their advice to the Chancellor.
The Institute of Fiscal Studies (IFS) has said that it’s likely that Sunak will increase the UK’s tax burden to the highest sustained level with ‘manifesto-busting tax increases’. The IFS went on to say that he could announce cuts for Government departments worth £2billion, despite them grappling with the task of reducing regional inequality. This figure could also grow over the coming two to three years.
The strong initial economic recovery following the vaccine rollout has given the Chancellor some good news; there is around £20billion less in government borrowing than was originally forecast.
The report also draws attention to the uncertainty around the long term effect of the pandemic. Some analysis has suggested that the economy could be 2-3% smaller in 2024/25 than was expected before Coronavirus, while the effects of Brexit are similarly unclear.
More Tax increases to come?
In his recent Conservative Party Conference speech, the Chancellor said that the UK’s pandemic recovery ‘comes at a cost’, and went on to highlight that national debt is almost 100% of GDP. He acknowledged that tax increases are always unpopular but stressed that public finances must be ‘put back on a sustainable footing’.
Though we’ve already heard of the Health and Social Care Levy funded by increases in National Insurance contributions, are more tax increases on the way?
Reform of Business Rates System?
The publication of the government’s Business Rates Review is due this autumn, having been delayed due to the pandemic. Experts have pondered over what the review will find. Businesses are calling for significant changes to the system, but as yet there has been no more than speculation as to the outcomes.
Could Tax Relief on Pensions be hit?
The latest figures on tax relief on pensions shows a £41.3 billion cost to the Exchequer for the year 2019/20, an increase from £38.2 billion the year before. Whilst an increase in statutory minimum pension contributions under automatic enrolment will have caused some of this growth, there are other factors which would have affected the cost too.
Karen Goldschmidt, pension tax specialist at consultants LCP said: ‘The Chancellor will undoubtedly be looking with great interest at the quoted headline figure of £41.3bn for the ‘cost’ of pension tax relief. But these figures provide no excuse for a Budget raid on pension tax relief. We need more pension saving, not less, and a raid on pension tax relief would send entirely the wrong signal to millions of people who have just started out on their pension saving journey.’
R&D Reform on the way?
In the past 18 months HMRC has substantially tightened its approach to compliance around the current R&D scheme as they’ve come under pressure from the Treasury to reduce fraud and errors in claims. The R&D tax relief framework is currently being reviewed, having seen UK businesses claim a record £7.4bn in R&D tax relief last year, up 19% from £6.3bn the previous year.
The growth suggests that more businesses are becoming aware of the opportunity to claim, but it is possible that Sunak will seek to reduce the level of expenditure for the scheme. Surely that would be short-sighted given the need to get the UK Economy back on track, with innovation being a key driver?
Can he find a way to give Directors a confidence boost?
The latest Institute of Directors Economic Confidence Index, which measures the net positive level of optimism in the UK economy among directors, recorded a negative value of -1% in September 2021, down from +22% in July.
The survey found that 75% of members of the Institute of Directors expected their costs to be much higher in the coming year than they were in the previous 12 months, while 61% anticipated wages would also rise.
Only 57% of directors expected revenue to rise, while 20% thought they would be static and 21% predicted they would fall.
It’s not a surprise, given the end of the Furlough Scheme, the increase in National Insurance contributions from April 2022, the continued impact of Brexit, fuel shortages, supply chain issues and inflationary pressures.
Rishi may well need to find a way to put a bounce back into the Directors of UK Plc.
As always, the speculation around what Rishi Sunak will or won’t say, or what he should or shouldn’t say, will increase until he actually stands up and tells us all what he’s decided. Along the way we’ll keep you up to date, and will compile and publish our guide to the Budget as quickly as we can once he’s spoken. As always, we’ll only hear the announcements as he speaks, and will then need to study the guidance issued and then bring clients up to date on anything of particular import to them.
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