Much has been made of the reduction in duty for sparkling wines, including Champagne, in the Budget last week. Until his announcement I wasn’t aware that a bit of CO2 in your vino resulted in more money going in to the government coffers. Had I done, as an Aberdonian, I would have simply stuck some white wine in my Sodastream.
On first listening, last week’s Budget announcement came as a relief. Given what we have gone through over the last twenty months and the massive expenditure undertaken by the UK and other governments to deal with the pandemic, I, like most people, feared the worst when Rishi stood up. But apart from some tweaking to a few duties including drink there was little that came as a shock. Phew!
On reflection that initial sense of relief was a bit premature. Although there was no change to the rates of Income Tax, Capital Gains Tax or Inheritance Tax, it had been previously announced, or is that advertised, that there will be a 1.25% increase* in the rate of National Insurance (NI) which will become a separate Health and Social Care Levy from 2023.
It was also previously announced there would be a freeze on various allowances and tax bands until 2026. This means the current level of Personal Allowance (the amount of income you can get before being liable to tax) will stay at £12,570, as will the basic rate tax band and the £100,000 level of income where the Personal Allowance starts to be removed.
In periods of low pay and price rises a five year freeze on allowances would not be too damaging, but in the current environment this is far from the case. As everyone knows we are seeing prices rise in most areas, and the Government predict inflation will reach 7% at some point in the next twelve months. Although they suggest it will fall from there, this is pure guesswork. If by chance inflation and pay rises do average 5% over the next five years the Personal Allowance should be at £16,000 to match its current level, and the £100,000 level should be at £127,000!
So although the rate at which we pay income tax will not alter we will all in effect pay more.
In my experience, of all the taxes Inheritance Tax is probably the most emotive, however, in the eyes of the exchequer it brings in peanuts. In 2019 it raised just over £5bn whereas NI brought in £142bn. What government wants to experience the angst of disgruntled voters, scared their lifetime savings are going to be pillaged on their death, when they can simply fleece them during their working lives?
So like most Chancellors in recent times Rishi has gone for the low hanging fruit. The *rise in the rate of NI is more accurately explained as an increase of 1.25 percentage points, not percent, which actually equates to more than a 10% increase which alone will result in a further £15bn being raised never mind the additional income the likely increase in salaries over the next five years will bring in.