In the changing landscape of the Covid-19 crisis, it remains to be seen what form commemorations for these events will take.
What we do know, is that as the UK continues to emerge from lockdown, there are clear economic parallels between the end of the Second World War and the current pandemic.
In both cases, a large public debt needed to be paid off, whether through cuts in spending, increased taxes, or further long-term borrowing.
The challenge for the Labour government in power at the end of the war was to increase taxes without penalising those people who had been on the front line of the war effort.
Is it possible to use the UK’s economic response to World War II to predict what the economic recovery might look like in the wake of coronavirus?
How much have we borrowed?
The Office for Budget Responsibility (OBR), recently reported that the government’s spending for this financial year alone could reach £298 billion.
The BBC report confirms that ‘before the crisis, the government was expecting to borrow about £55 billion’ this year. It borrowed more than that (£55.2 billion) in May alone. The UK’s debt is now £1.95 trillion, exceeding the size of the economy.
The Independent reports that the jobs furlough scheme is costing the UK government £14 billion a month. It is also receiving less in tax from unemployed or furloughed workers, from businesses whose profits are down, and from shoppers paying less VAT as they are buying less.
And the borrowing continues. The Summer Statement saw the Chancellor announce a temporary reduction in VAT, making it all the more likely that larger tax changes will be announced in the autumn.
3 ways the government might recover its debt through taxes
The Chancellor might try to claw some of this debt back through increased taxation.
1. Income Tax
The top marginal rate of Income Tax soared to 97.5% during World War II. Although no one is predicting a rise to those heights, we could see an Income Tax rise in the future, especially for those paying higher rates.
Income Tax, National Insurance, and VAT freezes were a Conservative Party manifesto promise, though, and higher taxes mean less money for the population to spend.
With more than half of the government’s revenue coming from the three taxes – Income Tax, National Insurance, and VAT – protected by their manifesto, coronavirus may make those promises untenable.
2. Inheritance Tax (IHT)
IHT stands at 40% today but after the Second World War, it rose to 80% and then to 85% by 1969.
IHT was already on the radar of many changes predicted to be announced in Rishi Sunak’s first Budget back in March. Having chosen not to make any changes, might the Chancellor see this as the right time to make those predicted tweaks?
The Chancellor could approach the problem in several ways: increasing the rate of IHT payable, reducing the thresholds currently in place, or reforming current reliefs.
This might see the so-called ‘seven-year rule’ abolished or removing the ability to pass on unused pension assets tax-free, for example.
3. Capital Gains Tax (CGT)
Rishi Sunak recently ordered a review into CGT. The Office of Tax Simplification will conduct the review to assess whether the current system is fit for purpose. CGT currently raises ‘less than £9 billion a year from just 300,000 people.’ By contrast, Income Tax generates almost £200 billion.
With tax rises increasingly likely in the wake of the freeze on Stamp Duty and the reduction in VAT, amendments could include increasing current rates in line with Income Tax, reducing CGT breaks in line with the dividend allowance, or scrapping the £40,000 Lettings Relief.
If you’re looking to manage CGT on a disposal of property or are concerned about gains on your investments, speak to us now.
The Summer Statement
For now, the temporary reduction in VAT and freeze on Stamp Duty show the government’s commitment to getting the economy moving again.
But the deficit will need to be made up and borrowing recouped. The post-Second World War era hints at the types of changes needed to plug the gap in the nation’s bank balance.
If you are a higher rate taxpayer, a pensioner, or a property owner, the Autumn Budget looks set to bring changes.
The only certainties are the thresholds, reliefs, and allowances that exist now.
Get in touch
If you’d like to discuss the impact of any potential changes on your finances, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
The Financial Conduct Authority does not regulate tax advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.