How reduced tax revenues could affect you
May 12, 2021
Covid-19 has contributed to a significant reduction in tax revenues for the 2020/21 tax year. HMRC has reported that total tax receipts for the year amounted to £584.3bn, which is almost £50bn less than the amount raised by the taxman during the previous year.
The greatest reduction in tax income was due to a fall of £28.8bn in VAT receipts. The closure of shops and hospitality during lockdown meant that as consumers we weren’t in a position to spend as much money, nor therefore pay any VAT on that cost. Air passenger duty also dropped by £3.1bn because so few flights have been taking place.
In other areas there was a reduction in corporation tax receipts (by £11.4bn), whilst the stamp duty holiday which the government introduced to give the property market a boost cost £2.9bn in missed tax revenues for the 2020/21 tax year.
Making up for the shortfall – CGT and IHT
Needless to say, the government has to find ways to compensate for this decrease in tax revenues, which is exacerbated further by its record spending on coronavirus-support funds that have been made available since March 2020.
Capital Gains Tax (CGT) and Inheritance Tax (IHT) are both key areas to watch out for with regards to increased tax payments. CGT brought in £10.6bn for the government’s coffers last year, up £785m from the previous year. Over the last three years CGT receipts have increased by 26%, and nearly tripled over the last decade.
Some of the recent increase in CGT revenue may be due partly to the stamp duty holiday – this has pushed up property prices, which in turn encouraged some second property and buy-to-let owners to sell up. There has also been a change in the rules regarding payment of CGT liabilities. Taxpayers now have a requirement to report and pay any CGT on UK residential property within 30 days of completion, which means that HMRC receives the tax owed much faster than previously.
Meanwhile the Chancellor has announced that the IHT threshold will be frozen at its current levels until at least 2025/26. So although IHT will remain a tax that many people never have to pay, over time proportionally more and more estates will be dragged over the current threshold. In making this move the Treasury expects to raise £1bn in extra IHT over the next five years.
Bearing in mind that tax rises of some description are almost guaranteed to be on the horizon at some point, make sure you have taken steps to protect yourself from paying over the odds. Remember to take advantage of your ISA allowance, and make the most of your annual pension contributions while you still can. If you would like any advice on reducing your tax liabilities, then please get in touch and we’ll be happy to help.