Chancellor weighs up options for inheritance and business taxes
The chancellor, Jeremy Hunt, is considering cutting inheritance and business taxes in next week’s Autumn Statement, according to sources close to the Treasury. The decision will depend on the latest predictions from the UK’s main economic forecaster, the Office for Budget Responsibility (OBR), which will be published on Friday. Mr Hunt has previously said tax cuts are “virtually impossible” and warned of “very difficult decisions” in the Autumn Statement, but he refused to rule out the possibility in a recent BBC interview.
The potential tax cuts come as Mr Hunt announced a £4.5bn fund to boost British manufacturing, especially in sectors where the UK is or could be world-leading, such as automotive, aerospace, life sciences and clean energy. The fund will support research and development, innovation and skills, and help businesses access new markets. Mr Hunt said the fund was part of his plan to “back British business with 110 growth measures” and make the UK “the best place in the world to start and grow a business”.
Inheritance tax threshold could rise
Inheritance tax is a 40% tax on the value of the estate – the property, money and possessions – of someone who has died. The tax is charged on the part of an estate that is above the threshold, which is currently £325,000 for individuals and £650,000 for married couples or civil partners. No tax is paid if the estate is valued at less than the threshold, or if anything above the threshold is left to a spouse, civil partner, charity, or a community amateur sports club. If a home is part of the estate and a person’s children or grandchildren stand to inherit it, then the threshold can go up to £500,000 for individuals and £1m for couples.
The chancellor is reportedly considering raising the inheritance tax threshold, which would reduce the number of estates that have to pay the tax. The tax only applies to about 4% of estates, but it is widely unpopular and seen as unfair by many people. Some argue that it is a form of double taxation, as the assets in the estate have already been taxed when they were earned. Others say that it discourages saving and investment, and encourages people to spend or give away their wealth before they die.
Business taxes could be cut
Business taxes are another area where the chancellor could announce some relief for firms. The main business tax is corporation tax, which is a tax on the profits of companies. The current rate of corporation tax is 19%, which is the lowest in the G20 group of major economies. The government had planned to cut it further to 17% in 2020, but this was cancelled by Mr Hunt’s predecessor, Rishi Sunak, in 2019. Mr Hunt could revive the plan to reduce corporation tax, or he could introduce other measures to help businesses, such as lowering the employer’s National Insurance (NI) contributions, which are a tax on the wages of employees.
The government has already raised the NI rate by 1.25 percentage points in April 2022, as part of its plan to fund health and social care. The rate went back to its previous level on 6 November 2022, but it is still 12% on earnings between £12,570 and £50,268, and 2% on profits above that. Cutting the NI rate could ease the burden on businesses and workers, and encourage hiring and wage growth. However, it could also reduce the government’s revenue and increase its borrowing.
Economic outlook remains uncertain
The chancellor’s decision on tax cuts will depend largely on the economic outlook, which is still uncertain amid the ongoing effects of the Covid-19 pandemic and the Brexit transition. The OBR, which is an independent body that assesses the health of the UK’s finances, will present its latest forecasts on Friday, which will show how the economy has performed and how it is expected to perform in the future. The forecasts will also show how much the government is borrowing and spending, and how this affects its debt and deficit.
The OBR’s previous forecasts, published in March, were more optimistic than expected, as the economy recovered faster than anticipated from the lockdowns and restrictions imposed to contain the virus. The OBR predicted that the economy would grow by 4% in 2021, 7.3% in 2022, and 1.7% in 2023, and that the government’s borrowing would fall from £234bn in 2021-22 to £107bn in 2022-23. However, since then, the economy has faced new challenges, such as rising inflation, supply chain disruptions, labour shortages, and higher interest rates. These factors could dampen the growth prospects and increase the borrowing costs for the government.
Political pressure for tax cuts
The chancellor is also under political pressure to cut taxes, as his party faces a backlash from voters and MPs over its recent tax hikes and spending cuts. The Conservatives have traditionally been seen as the party of low tax and fiscal prudence, but they have raised taxes to the highest level since records began 70 years ago, according to the Institute for Fiscal Studies (IFS) think tank. The government’s single biggest source of revenue is income tax, which it has frozen until 2026, meaning that more people will pay higher rates as their incomes rise. The government has also increased the NI rate, as mentioned above, and the dividend tax, which is a tax on the income from shares.
The tax rises have been criticised by many Conservative MPs, who argue that they are unfair, unwise, and unpopular. They say that the government should instead focus on growing the economy, cutting spending, and reducing the debt. They also fear that the tax rises will alienate the party’s core supporters and lose them votes in the next general election, which is due by 2024. Some cabinet ministers, such as Housing Secretary Robert Jenrick, have suggested that tax cuts are possible if the government meets its target of halving inflation by the end of 2023. However, the chancellor has so far played down the expectations of tax cuts, saying that the best way to reduce the tax burden is to grow the economy.
