Tax Cuts, Spending & Growth – it’s tricky!
Posted on: October 26th 2022 · read
The UK has now had three very different Prime Ministers in two months and the market turmoil is something that all have seen played out on the news. What then can Rishi Sunak do with very limited resources to achieve the growth and levelling up agenda that has been promised and which the country so clearly needs?
The tax cutting agenda of Liz Truss was a reasonable approach to the problem of low growth and investment and business and entrepreneur friendly. However, it wasn’t presented as part of a viable costed plan and therefore failed the “sniff test” for the international markets.
Rishi Sunak has sound business pedigree and predicted much of the chaos during the hustings for the first Conservative party leader election, which gives him some credibility - at least for now. How then can he promote growth without tax cuts, and possibly with the need to raise taxes further in the short term?
Here are a few potential options -
Business investment could be made far more attractive with a much wider capital allowances relief that gives business a write-off for more investment cost quicker than now (the £1m AIA already goes some way with this but perhaps it should go further).
Incentives for investment by wealthy individuals via such schemes as EIS and VCT’s could be widened further. The proposed new corporation tax rate of 25% might be in line with most G7 countries but given our current parlous state, is perhaps too high. Yo-yo-ing to reduce it again may not wash with the markets or look too good politically, but perhaps a small reduction could be brought in to 24%, with others planned for the next five years depending on how the economy performs.
Turning to raising taxes, the country is already wilting under historically high taxes but one area of the goose as yet unplucked is higher rate relief for pensions. Notoriously difficult to do though, it could provide a sizeable amount of additional tax with limited political fallout (given the simple fact that most of the tax relief is received by the top few percent of earners). Taking into account the political issues the government currently faces; this may be a step too far and with luck it will not be needed! However, I know the advice I will be giving clients who currently can get higher rate tax relief on their pension contributions - use it or lose it!
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