The new UK Government has been formed. Despite the Labour Party’s campaign and pledges around keeping tax rises to a minimum, expert opinion suggests that future rises are inevitable.
The inevitability of higher taxes
For the foreseeable future, the freeze on most tax thresholds is likely to remain in place.
The thresholds’ freeze means that even moderate pay rises push taxpayers into higher brackets, effectively increasing their tax burden without any formal rise in tax rates.
This stems not only from the specific pledges of the main parties but also from the broader economic assumptions that have been made.
Many anticipated spending cuts have been factored into budget forecasts, which will likely boost the Government’s need for higher tax revenues.
Without significant economic growth in the short term, the new Government will face a tough decision between making deep spending cuts or raising taxes.
The trilemma
One may wonder why this scenario must be the case and whether it might be avoided. However, as the Institute for Fiscal Studies put it before the election any Government would face the same “trilemma”.
Speaking to the BBC, Paul Johnson, Director of the IFS, said: “Huge decisions over the size and shape of the state will need to be taken, that those decisions will, in all likelihood, mean either higher taxes or worse public services”.
The IFS says that only three options exist for the Government: “Raise taxes by more than they have told us in their manifesto. Or implement cuts to some areas of spending. Or borrow more and be content for debt to rise for longer.”
Preparing for the future
Regardless of the election outcome, tax liabilities look poised to increase – by how much is now the question.
As accountants, our role is to help you navigate these changes, ensuring you’re properly informed and prepared.
Please get in touch for more information or tailored guidance on this issue.
