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What’s in store for tax policy?

Date: 02 June 2020

Before the onset of the Covid-19 pandemic, the government expected to bring in the following amounts of revenue in the 2020/21 financial year: 

chart for public sector  current receipts 2020-21, source HMT Budget 2020

Due to the Covid-19 pandemic, tax receipts are expected to fall by £130bn in 2020/21 against the Budget projection and spending will be £88bn higher.

In the short to medium term, it is likely there will be few fiscal changes from the government so they ensure that consumers spend once lockdown measures end.

But in the medium- to long-term, tax rises will be inevitable. A survey of 75 MPs across all political parties found that 72% of MPs agree that “taxes will increase to fund public services" and the government will have to send a signal to markets, and the electorate, that they are committed to reducing the deficit. Public support for further austerity and cuts to public services is at an all-time low and the Prime Minster has ruled this out as a future strategy. 

It is likely that there will be a combination of measures to reduce the deficit in the long-term. Potential changes include:  

Income tax

Income tax accounts for the largest proportion of government revenue at nearly a quarter of all receipts. HMRC estimate that a single percentage point increase in the basic rate of income tax from 20 to 21% would add £4.7bn to government income in 2020-21.

Increasing the higher rate from 40 to 41% would lift the tax take by about £1bn and an increase in the additional rate band from 45 to 46% would only raise about £105m.

Income tax hikes would be controversial given the Conservatives’ manifesto promise that they would “not raise rates of income tax, national insurance or VAT”, but the public will likely accept it if the government broke their promise given the circumstances.

National Insurance Contributions

The government could also scrap the National Insurance Contributions (NICs) upper earnings limit. At present, employees pay 12% NICs on earnings between £9,501 and £50,000, but just 2% on income above this level.

The Chancellor has already hinted that NICs will change for the self-employed, who pay class 4 NICs at 9% on earnings of more than £9,501 a year compared with employees who pay 12%.

Pensions tax relief

There was speculation that the previous Chancellor would reduce the rate of relief for higher earners down from 40% by introducing a flat rate of tax relief, rather than one linked to income tax brackets. This could involve a universal flat rate of around 30%, although this would be broadly cost neutral. The government could cut it to 25% or even align it to the basic rate of income tax at 20% in order to save money. This would be hugely controversial and complex to implement but it is not inconceivable. 

It is estimated that government could save £10bn a year by setting the rate at 20%.

Pensions triple lock

The triple lock guarantees that the state pension goes up every year by the higher of either 2.5%, the rate of inflation or average earnings growth. According to the leaked Treasury document, scrapping the lock to remove the guaranteed 2.5% increase would save around £8bn a year.

Stamp duty

Stamp duty is a firm favourite when it comes to raising cash and has risen more than any other over the past few years. The latest HMRC figures show that receipts were down in the first quarter of this year compared to the first quarter of last year at £2.5bn vs £2.6bn. However, given it’s at such a high level already and the property market will need to recover dramatically from the lockdown it may not be on the government is willing to tweak this time. 

Capital Gains/Inheritance tax

Together, Capital Gains Tax and IHT account for only around 5% of total HMRC receipts​. The government may scrap the Residence Nil Rate Band or implement the APPG on Intergenerational Fairness’ proposals to lower the headline level rate of IHT to 10% but expand the number of people that pay. 

Only 260,000 paid CGT in the 2017/18 tax year so it is not a big earner for the government. However, if the government is looking to make some small wins then they may make changes by equalising CGT rates to rates paid on income tax, or removing the annual allowance.   


VAT makes up the third largest source of government tax revenue and may be a target for the Chancellor in the future, although it is unlikely to change in the short-term as it could reduce consumer spending and prolong the downturn.  

Wealth tax

Some economists have proposed a wealth tax, either in the form of a one-off or ongoing levy. It has been estimated that a 2% levy on UK HH net wealth, calculated to be around £15tn, would raise £300bn[1]. However, it would require international cooperation to stop people shifting domicile and there would be a number of implementation difficulties.


After pensions tax relief, Private Residence Relief is the second most costly relief for the government, worth around £26.7bn in 2018-19[2]. There were rumours that Philip Hammond would cap private residence relief t £225,000 per transaction, meaning those making significant gains would be subject to capital gains tax at 28% and this could be on the cards in future.