Budget March 2021: Tax rises not ruled out

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The Chancellor faces pressure not to hike taxes this week
PA Images / Alamy Stock Photo

Chancellor Rishi Sunak has not ruled out tax rises in this week’s budget (3 March) after saying that he wants an “honest and fair” route towards paying back national debt while supporting people back into work.

Speaking at the weekend, Sunak said: “What I want to deliver is support for our economy, now when it needs it, support along that roadmap helping to drive our recovery.”

In its manifesto before it was elected into power in 2019, the Conservative party committed to a “tax lock” that would ensure income tax, national insurance and VAT would not rise over the course of the parliament, but this has come under increased pressure due to the pandemic.

He said that financial support such as the furlough scheme would be wound down in a way that is “aligned” with the Prime Minister’s planned roadmap for reducing pandemic restrictions, which are due to cease on 21 June.

He refused to comment on whether there would be a three-year freeze on the income tax thresholds, which has been suggested by some sources. This would raise income for the Treasury by “stealth” as people moved into higher income bands and paid more tax.

Sunak said: “I would like to be able to keep taxes low for people in general,” he said. “I’m a Conservative and I believe in that.

“But I want to deliver our promises we made to the British people that we will be responsible with their money, that we will look after the nation’s finances.”

Last week, the House of Commons Treasury Committee published a report on ‘Tax after Coronavirus’, looking at potential avenues for adjusting the tax system to support public services while acknowledging that high levels of support are still needed.

It said: “The tax measures that are most politically palatable in the short term are often not those that minimise distortions to economic activity in the longer term.

“This is a large-scale and long-term challenge that requires taking a view of the whole tax system, how it can be reformed, and how it can raise revenue in a way that minimises economic damage as well as effectively supporting public services, which can in turn promote growth.”

It said it had not seen enough evidence to recommend “a wholescale merger of national insurance contributions and income tax”, but suggested the “distortions” between the two could be removed gradually over time.

The report acknowledged that personal tax rises would be the best way to “raise tax revenue quickly and at a large scale”. However, it added that there would need to be “careful consideration” for any increase in income tax or National Insurance.

“Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority,” it recommended.

What has been strongly hinted is a reform of how self-employed people are taxed. The report said “the current system is confused, unfair and unsustainable” and calls for an end to the “three person problem” where someone can be described as an employee for legal purposes but may have a different status for tax.

This simplification was one of the key recommendations of Matthew Taylor’s Review of Modern Working Practices, but there has been little movement on this so far. Changes to off-payroll (IR35) legislation due in April are aimed at claiming more tax from individuals who claim to be self-employed but should be taxed at PAYE levels.

Dave Chaplin, CEO of ContractorCalculator and IR35 Shield, said this was “yet another report that calls for a review” on how to tax the self-employed.

“We’ve had so many of these in the last decade, one loses count. A call for a review is a way to kick something into the long grass and reminds me of a scene in Monty Python’s Life of Brian where one of them says ‘Right, this calls for immediate discussion’.

“The same old arguments and problems get raised, and commentators, including myself, all preach from their own academic or professional bubbles, which fail to take into account the entire picture.

“This is a hard problem, and any solution will create considerable distortion with winners and losers. Because of the short five-year Parliaments, no government ever wants to be brave enough to make the changes required, because it’s a sure fire election loser.”

Mel Stride MP, chair of the Treasury Committee, said: “Tax is often an area of significant disagreement between parties, so I am particularly pleased that the cross-party Treasury Committee has unanimously agreed this report.

“With our public finances on an unsustainable long-term trajectory, our clear message is that Budget 2021 is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. But we will probably need to see significant fiscal measures, including revenue raising, in the future.”