PM raises taxes – business news 8 September 2021
James Salmon, Operations Director.
PM raises taxes to fund NHS and social care. New 2.5% tax rise is an attack on small business, and a drag on jobs and growth. Triple lock pension pledge suspended and more tax rises look set to follow.
PM raises taxes to fund NHS and social care
Boris Johnson is going ahead with plans to increase National Insurance as the Government seeks to reduce soaring NHS waiting lists and tackle the social care crisis. The tax will increase from April 2022 by 1.25% for both workers and employers.
The pensions triple lock has been abandoned, meaning retirees will no longer see their state pensions increase by average earnings this year.
Additionally, income from share dividends will also see a 1.25% tax rate increase and working pensioners will pay national insurance for the first time.
The self-employed will also pay the new levy.
The Institute of Fiscal Studies warned it would increase the tax burden to its highest ever peacetime level while health experts warned that only £5.4bn of the total three-year £36bn package was earmarked for social care. Announcing his plans to the House of Commons, Mr Johnson admitted breaching his manifesto but said the Covid pandemic justified it. He also said he could not rule out further tax increases before the end of this parliament.
Johnson’s 1.25% levy is really a 2.5% tax rise on earnings
Commenting on the Prime Minister’s plans to increase funding for health and social care, Paul Johnson, director of the Institute for Fiscal Studies, said the dual nature of national insurance contributions meant that Boris Johnson’s tax hike amounted to double the 1.25% announced. “We keep saying 1.25% – it is really 2.5%,” he told BBC Radio 4’s World At One. “It is one-and-a-quarter from the employer on every £100 you earn, it is one-and-a-quarter from the employee – you add that up and it is 2.5%. It is really a 2.5% tax rise on earnings.” He added: “This is £12bn on top of £25bn of tax rises in the Budget – this must be the biggest tax rising year in many decades.”
Tax receipts from National Insurance have risen by 135%, from £61bn to £143bn over the last 20 years, according to UHY Hacker Young. This is far faster than in increase in overall tax and income tax, which have risen by 85% over the same period.
We should be simplifying taxes, not raising them
Commenting on Boris Johnson’s latest tax hike, the Telegraph’s Matthew Lynn says the British tax system is a “shambles” and while it would take “political energy and capital to reform it, so does increasing national insurance.” He adds: “We could pay for social care, and increase funding for the NHS, with sweeping tax reforms instead of fiddly increases. All we need is a Prime Minister and a Chancellor with the courage to actually try it.”
Elsewhere, the FT’s Helen Thomas says complaints about the rise in NI from business is justified. She cites Neil Carberry at the Recruitment & Employment Confederation, who points out that unlike corporation tax, national insurance isn’t levied on profits: it is a tax on activity. Analysis by PwC of the largest 100 companies shows national insurance is a bigger cost to businesses than corporation tax.
Raid on dividend income an attack on small businesses
Commenting on the increase in dividend taxes announced by Boris Johnson yesterday, Kitty Ussher, a former Labour City minister who is now chief economist at the Institute of Directors, accused ministers of targeting smaller company bosses who rely on dividend income. She said: “This Government has shown through its actions a total lack of understanding of the very real difficulties faced by owners of the smallest businesses in Britain.”
Elsewhere, Mike Cherry, chairman of the Federation of Small Businesses, said that chief executives who fought to avoid laying off staff at the height of lockdown are now being punished for this loyalty. He said: “These hikes will have business owners and sole traders feeling demoralised at the point when they’re trying to recover from the most difficult 18 months of their professional lives. For those thinking about starting up, they send completely the wrong message. This move marks an anti-jobs, anti-small business, anti-start up manifesto breach.”
New tax is a drag on jobs and growth
Suren Thiru, head of economics at the British Chambers of Commerce, said the new 1.25% employer national insurance contribution would be a “drag anchor on jobs growth at an absolutely crucial time”. “Firms have been hammered by 18 months of Covid-related restrictions and have built up huge debt burdens,” he said. “This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit needed to drive the recovery.
Elsewhere, Lord Bilimoria, President of the Confederation of British Industry (CBI), said that although there is “genuine consensus” that social care reforms and greater investment are long overdue, businesses “are already set to be hit by a substantial rise in corporation tax in 2023.” He went on to say that the dividend tax would dampen investment which “plays a critical role in supporting businesses and enabling growth across the whole economy”.
Make UK: New tax “ill-timed and illogical”
Stephen Phipson, the boss of manufacturing trade group Make UK, said the new social care tax’s introduction was “ill-timed as well as illogical.” He said that “firms need capital to reset”, and told the BBC: “After witnessing large scale redundancies at the height of the pandemic and the plug being pulled on the furlough scheme, government should be putting in place measures to protect jobs and incentivise recruitment.”
Tax experts predict IHT and CGT will be next
Experts are warning that the Government may have its sights set on increasing inheritance tax and capital gains tax next as the Chancellor and Boris Johnson seek new ways to fund social care, the NHS and Covid bailouts.
Julia Rosenbloom, tax partner at Smith & Williamson, said more estates already face an IHT shock due to soaring property and share prices. They could soon face even higher bills. “Personal taxes, including IHT and CGT, could be in for a massive overhaul given the amount they raise for the Treasury.”
Alan Harvey, financial planner at wealth manager Brewin Dolphin, said a major CGT increase seems likely and his clients are preparing for it. “Some are keen to pay CGT bills now rather than later, when rates are likely to be higher.”
Shaun Moore, tax and financial planning expert at Quilter, also fears an upcoming capital gains tax hike, possibly as soon as this autumn. “CGT receipts dwarf those from inheritance tax and as such the Treasury will consider this a more attractive tax to raise.”
Triple lock pension pledge suspended, spell broken
The Government has confirmed a one-year suspension of the “triple lock” formula for annual state pension increases. The move follows concern among ministers that a big post-pandemic rise in average earnings would have meant pensions increasing by 8%. Work and Pensions Secretary Therese Coffey said the average earnings component would be disregarded in the 2022-23 financial year. Instead, the rise will be the consumer inflation rate or 2.5%.
Commenting on the move, Sir Steve Webb, former pensions minister and now partner at consultancy LCP, said tampering with the triple lock could “break the spell” and set a precedent for more tinkering in future. “The great advantage of being a pensions minister with the triple lock is we didn’t have to go to the Treasury with a begging bowl to win an increase each year. The increase shouldn’t be based on what we can afford this year but it could go that way. The first time you tweak it it’s shocking and then it becomes more normal,” Sir Steve said.
Younger business owners performed better during pandemic
A report on small and medium sized businesses published by AXA indicates that firms with younger owners reported lower reductions in turnover during the pandemic. In 2020 companies run by decision makers who were aged between 55 and 64 saw an average reduction in turnover of 29%, this fell to 12% for 25 to 34 year olds and 7% for businesses run by 18 to 24 year olds.
“The report finds that younger entrepreneurs have brought out new services and products, have listened to the needs of local clients, and have been much faster to deploy digital solutions,” said Claudio Gienal, CEO of AXA UK and Ireland. The study also revealed that 46% of SMEs run by under-35s introduced new products and services during the pandemic, but only 40% of over-35s did the same.
Smiths Group
Smiths Group said it had been agreed to sell is medical business to ICU Medical to $2.4 billion, with the bidder having trumped a rival $2.0 billion offer from TA Associates.Smiths said said the offer valued the medical business at $2.7 billion when its debt was included (its ‘enterprise value’) plus an additional $0.1 billion contingent on future share-price performance.
Dunelm
Dunelm reported a 45% rise in annual profit, declared a special dividend and upgraded its guidance as sales held up throughout the pandemic. Pre-tax profit for the year through 26 June increased to £157.8 million, up from £109.1 million year-on-year, as sales climbed 26% to £1.34 billion
Biffa
Biffa said its revenue had risen 12% year-on-year in the first five months of its financial year, though it noted it was facing a shortage of drivers.Revenue for the five months through August was up 3% excluding acquisitions, it added.
Mortgage price war helps lift average UK house price
New figures from Halifax indicate that a combination of ultra-low interest rates, pent-up demand and a rebounding jobs market saw the price of a typical home rise 0.7% month-on-month in August to £262,954. It means the average price of a UK home is 7.1% higher now than the £245,602 recorded in August 2020. Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Property prices are rising due to lack of stock, while cheap borrowing rates give borrowers confidence to go after the property of their dreams in the race for space.” There were “plenty of props” currently for the housing market, said Martin Beck, senior economic adviser at the EY Item Club. “Consumer confidence has remained high, the labour market is emerging from the crisis relatively unscathed and buyers have continued to benefit from ultra-low mortgage rates,” said Mr Beck.
Government denies plan for October lockdown in England
Downing Street has denied reports in the i newspaper yesterday that it is planning an October lockdown in England. The prime minister’s spokesman said plans had been kept for a range of scenarios – “but these kind of measures would only be reintroduced as a last resort to prevent unsustainable pressure on our NHS”. “I think we’ve been clear throughout that we will take action, and indeed we have done when necessary to protect our NHS,” he said. But the spokesman pointed out that when rules were brought in the past, the UK did not yet have the protection from vaccines.
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