U.K.’s $500 Billion in Tax Breaks Are a Tricky Budget Target
U.K.’s $500 Billion In Tax Breaks Are a Tricky Budget Target
(Bloomberg) -- Prime Minister Boris Johnson might be about to go after Britain’s “staggeringly rich.”
There’s no full-scale attack of wealth coming, but the country’s myriad tax breaks -- some of which mainly benefit the rich -- could be targeted in next week’s budget by a government that needs every penny to fund the biggest spending spree in years. Local media have pinpointed the controversial Entrepreneurs’ Relief as a candidate for the scrapheap.
Britain has more than 1,100 reliefs that cost more than 400 billion pounds ($517 billion) a year -- the equivalent of half of all government spending.
But the most expensive programs are either vital for encouraging investment -- a priority for the government as it tries to boost productivity -- or popular among the traditional backers of Johnson’s Conservative Party. Programs like the incentive for entrepreneurs, on the other hand, are too small to make a difference.
Take the breaks that higher-rate 40% taxpayers enjoy on money paid into their pensions as an example. Together with employer contributions, pension tax reliefs cost over 40 billion pounds a year in lost revenue -- the equivalent of the U.K.’s entire schools budget. Limiting relief to the basic 20% tax rate would generate 11 billion pounds, according to the Institute of Fiscal Studies.
But there’s a sting: It would hit people earning more than 50,000 pounds a year, for whom Johnson promised tax cuts during his campaign to become Conservative leader last year.
Successive Tory governments have refrained from meddling with pension tax relief for fear of angering their middle-class vote base. Instead, they’ve reduced the amount people can build up in pension pots before incurring a tax charge.
Balancing Act
The government’s ambitions are now giving Chancellor Rishi Sunak, just a month in the job, quite a precarious balancing act. He may have to tear up existing fiscal rules if he’s to deliver on his spending ambitions. His situation has been further complicated by the coronavirus, which will hit global and U.K. economic growth, as well as tax revenue.
Entrepreneurs’ Relief is hugely unpopular, and even Johnson himself hit out in January, saying it’s being used by the “staggeringly rich” to make themselves “even more staggeringly rich.” The Resolution Foundation think tank has dubbed it the worst tax break in Britain.
But many Conservative lawmakers support the break, which which they see as a symbol of the party’s commitment to enterprise. The Treasury refused to comment on whether the measure will be scrapped.
It was introduced by the Labour government in 2008 and extended by the Conservatives to encourage risk taking in the aftermath of the financial crisis. It means people selling companies pay 10% on capital gains up to 10 million pounds rather than the full rate of 20%.
Another Solution?
But only a relatively small number of wealthy individuals benefit. In the fiscal year ended March 2018, much of the 2.3 billion pounds of relief went to 5,000 people who realized gains of more than 1 million pounds.
Mike Cherry, chair of the Federation of Small Businesses, said the “obvious” answer is to scale back relief above the 1 million-pound mark.
“Scrapping entrepreneurs’ relief would destroy the retirements of thousands of business owners,” he said. “Fundamentally we want to make the U.K. a more, not less, attractive place to start up a business. If this incentive goes, we risk losing entrepreneurs to other climes.”
To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Alaa Shahine
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