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Tax Changes Forecast For New Government

Before the election the Institute of Fiscal Studies announced that the new government would have to significantly reduce spending or increase taxes, ot both in order to control government debt.

This has resulted in speculation as to what measures the new Labour Government may introduce in order to increase taxes. Below are listed various potential changes which have been rumoured:

  • A significant reduction in the VAT registration threshold from the current level of £90,000. The UK threhshold is very high compared to the rest of Europe. Euro zone countries typically have VAT registration thresholds of between 10,000 Euros and 50,000 Euros. Having a much lower VAT registration thrshold levels up the playing field, as smaller businesses do not have the advantage of being able to undercut larger VAT registered businesses. There is also a lower risk of businesses evading tax by undertaking ‘cash jobs’, in order to avoid breaching the VAT registration threshold.
  • An increase in Capital Gains Tax rates from the current 10% or 20% (18% and 24% on redisential property) to a rate level with the income tax rates. Capital Gains Tax would then be 20% for basic rate tax payers and either 40% or 45% for higher rate tax payers. Such a change in tax rates would seem to result in a fairer tax system, although someone having emplyment income would also suffer National Insuranceon earned income.
  • Scrapping higher rate tax relief on pension contributions. Again this would seem to be a sensible change as the tax relief obtained by paying into pensions would be the same whatever the level of income the tax payer has.
  • Scrapping the current exemption for pension’pots’ in terms of Inheritance Tax. Currently assets held in pensions are not counted as part of a deceased estate for the purposes of Inheritance Tax. Such a change in the tax rules would again seem to be sensible as the current rules allow Inheritance Tax to be avoided.