Killik & Co – 4 things we’re thinking about for 2022

By Shaun Robson, Head of Wealth Planning at Killik & Co

1) Stealth Taxes

Earlier in 2021, we saw Chancellor Rishi Sunak announce a series of tax freezes in the Spring Budget. It is important not to underestimate the effect of tax freezes as these can result in more taxes due where income and assets for example experience inflationary increases. The freezes are thus a way for the government to increase tax revenue through measures short of introducing additional taxes and could be argued to fall into ‘stealth tax’ territory.

This remains an interesting topic for 2022, especially in light of reports that the Chancellor may be looking to reduce income tax rates and in fact abolish the top additional rate income tax band prior to the 2024 election – a move that could cost the government significantly given their largest revenue comes from income taxes according to the Office for Budget Responsibility.

Whilst this potential loss in revenue will be somewhat made up by the introduction of the new Health and Social Care levy and other planned increases in taxes from April 2022 and 2023 onwards, such as on dividend income and corporation tax, it still leaves a hole to be filled given the significant additional stimulus policies required by the government over the course of the Covid-19 pandemic. It therefore remains to be seen whether the government will introduce further measures in their 2022 budgets to help fill the gap – whether via express taxes or stealth taxes.

2) Pensions

Following on from several years of speculation on whether Government will pass measures to raise more revenue from pensions, we will be looking out for changes that would impact their status as one of the most tax-efficient savings vehicles in 2022. Already, pension savers are being affected by a freeze in the pension lifetime allowance (an example of the stealth taxes mentioned above) and a change in the annual allowance tapering for contributions from high earners.

We are therefore on the lookout for further measures that could have a significant impact, such as:

  • Removing or limiting the inheritance tax efficiency attributed to money purchase pensions, as these pots are currently considered outside of the taxable estate for inheritance tax purposes.
  • Reductions in the non-tapered annual allowance for contributions, which currently sits at £40,000 per annum.
  • Reductions or limits to tax relief on pension contributions or even a flat rate of tax relief.
  • Taxing employer pension contributions.
  • Further lowering the pension lifetime allowance from its current amount of £1,073,100 and/or increasing taxes paid on funds in excess of this allowance.

3) Wealth Tax

There have been discussions in the UK as well as elsewhere on whether there is merit to a tax on the wealthiest to redistribute wealth and generate additional revenues for the government. So far, whilst the idea was debated by Government in September 2021, the Government seem fairly firm in their stance that a Wealth Tax is not being considered at this time as existing tax rates and the planned changes mentioned in the previous sections already put the UK ‘among the top G7 countries for wealth taxes as a percentage of total wealth’ according to The Wealth Tax Commission, a research commission independent from Government.

It thus seems unlikely that a Wealth Tax will be announced by the current Government, however it has in its response to the petition for a Wealth Tax as issued to the House of Commons stated that it may of course reconsider this area in the future.

Considering the recent reports that Chancellor Rishi Sunak may be looking to abolish the additional rate income tax band as mentioned in a previous section, it will be particularly interesting to see whether the idea of a Wealth Tax has now died altogether for the current Government or whether this may in fact get picked up again in the future in order to increase tax revenue – perhaps in the form of a one-off tax as proposed by The Wealth Tax Commission rather than as an annual levy.

4) CGT equalising with Income Tax?

Some may remember that in advance of the Autumn Budget, there was a fair amount of talk on Capital Gains Tax (CGT) and whether CGT might be raised or possibly even put on an equal footing with income tax. Whilst this was clearly not realised, it remains to be seen whether Government deems the other measures announced by the Chancellor sufficient to plug the hole left in public finances or whether further measures are required.

If further revenue is required and Government decide to target the existing capital gains tax regime, there are a number of changes that could be made by either increases in capital gains tax and/or the reduction of the annual exempt amount, both of these could have a significant impact on anyone required to draw on invested capital and lead to a higher tax liability.

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