The coronavirus crisis has left a hole in the public finances, with debt exceeding 100% of (a somewhat diminished) GDP. There are traditionally three main ways that this can be financed:

1. Increase borrowing
2. Increase taxes
3. Decrease public spending

The first has been the approach so far, although there is still the possibility of locking in debt for the long term by issuing long-dated government bonds as was the case after both world wars.

Prime Minister Boris Johnson has ruled out a return to austerity, which is politically toxic and arguably economically unwise at a time of subdued demand.

This leaves tax increases, although these will need to be carefully targeted and timed to avoid weakening a nascent recovery. Unprecedented times give the opportunity for bold thinking and reform, which may be tempting for a Chancellor who has declared himself to be “unencumbered by dogma”. So what might he do?

Capital gains tax rates

The rates of capital gains tax (CGT), broadly 20% for higher rate taxpayers, are very low by historical standards. Indeed, it wasn’t much more than a decade ago that CGT rates were aligned with those of income tax. With that in mind, it is not unreasonable to think that Mr Sunak may once again align CGT and income tax rates.

It is unlikely, though, that CGT will be subsumed entirely under the umbrella of income tax, as is the case in some countries. There are important differences between income and capital gains, notably that gains may be significant in one year but that there may be no gains or even capital losses in other years. Inflation is also an issue where assets have been held for long periods of time, which could be negated by reintroducing indexation allowance.

Aligning CGT rates with income tax rates would also reduce the incentive to avoid tax by recharacterising income as capital gains. This has been the subject of increasingly complex anti-avoidance rules, which could be rendered largely unnecessary.

The annual exemption could be abolished, although this tax-free allowance (currently £12,300 per year) cuts down on administration and its abolition would raise relatively little revenue.

Capital gains tax rates reliefs

By far the biggest CGT relief is principal private residence relief. With most wealth tied up in people’s main homes, it will surely be tempting to reform or abolish this relief. However, it would be politically controversial, particularly for a party whose traditional supporters are homeowners.

The effects of abolishing the relief could be very uneven, hitting hard those who have owned their house for many years whilst leaving those who moved recently unscathed. To counteract this, it is likely that only increases in value from a given date (for example, the day of the Budget) would be taxed. However, this would mean that it would take years for the abolition of principal private residence relief to raise significant revenue, particularly as house prices are at a historic high.

Entrepreneurs’ relief was only recently changed when the lifetime allowance was reduced from £10m to £1m, but given criticism that it does little to increase investment, its abolition could be considered once more.

Wealth tax

The current crisis has hit many of the poorest hardest, and in an increasingly unequal society a wealth tax might seem like an obvious choice. However, it appears to have been ruled out by the Government. Beyond ideology, there are practical reasons for this.

A wealth tax would be an administratively difficult task, as it would require a declaration of wealth to be made by all individuals – not something that is required under the current tax compliance system. With records of wealth needing to be built from scratch, it would be prone to evasion and avoidance.

Annual land/property value tax

Property taxes, on the other hand, are much harder to avoid for the simple reason that it is rather tricky to move land. This could take the form of a land value tax or a property tax. The former is a levy on the unimproved value of land, ignoring the value of buildings which is included in a property tax.

A land value tax encourages productive use of the land and introduces a cost to land speculation, so could potentially spur development. The downside is the administration involved in valuing land across the country.

Such taxes could replace stamp duty land tax, which creates friction and distortions in the housing market by adding to the cost of moving home.

National Insurance

National Insurance could be abolished by merging it into income tax, creating instead higher income tax rates. This would align the tax rates for earnings and other forms of income, which due to National Insurance are effectively higher for earnings with seemingly little policy rationale. National Insurance is also a regressive tax, with higher earners charged at a lower rate than many lower paid workers.

Abolishing National Insurance would help level the playing field between the employed and self-employed, which is driven largely by the difference in National Insurance rates between the two. Combined with aligning dividend rates to those of other income (see below), this should eliminate much tax avoidance in this area and the burdensome red tape for businesses that has been and is being introduced to deal with this.

However, most National Insurance is paid not by individuals but by employers,. It seems unlikely that individuals will want to take on this burden in the form of higher tax on their wages, fearing (probably rightly) that their employers will be reticent to pass on their savings to their employees in the form of higher salaries. Instead, a payroll levy could be introduced to replace employer’s National Insurance, but this could undermine the levelling of the playing field between the employed and self-employed discussed above.

Abolishing National Insurance would impact the over-65s, who currently do not have to pay it. Raising income tax rates would be keenly felt by this group, who are a key Conservative demographic.

It should also be noted that the Conservative manifesto pledged not to raise National Insurance, income tax or VAT rates. Although it could be argued that the current crisis has changed everything, accusations of breaking promises would undoubtedly be made by some. A watered-down version of the above with aligning of income tax and National Insurance thresholds could raise revenue without technically changing and tax rates, although the manifesto also pledged to raise the National Insurance threshold to match the income tax personal allowance.


The tax rules for pensions effectively defer tax, with tax relief given for contributions and later withdrawals being taxed. Given that earnings during a person’s working life are generally higher than the pension they receive once they retire, this often results in an overall tax saving. To counteract this, first an annual cap on pension contributions was introduced, followed by a lifetime cap on the value of pension pots. However, it’s still possible to get higher and additional rate tax relief on contributions of up to £40,000 per year – an amount well above the median earnings in the UK. It is quite possible, therefore, that this cap could be lowered again or that relief is restricted to basic rate tax.

Given the rationale of the tax rules for pensions, there seems to be little justification for the 25% tax-free pension lump sum. This could therefore also be scrapped, although this could be seen as a retrospective change for those who have saved into their pensions with the expectation of withdrawing 25% of their pension pot tax-free.


Dividends have long been taxed at a lower rate than other income, as compensation for the fact that company profits have already been subject to corporation tax. In an era of low corporation tax rates this may seem unnecessary, but dividend rates were significantly increased four years ago to reflect this.

Even so, the Chancellor may be tempted to align dividend tax rates with general income tax rates as it is unlikely to be politically controversial. Depending on other reforms (particularly National Insurance and corporation tax), this may mean that it is no longer beneficial for business people who own their own companies to pay themselves with dividends.

Corporation tax

In the run up to the last general election, it was announced by Boris Johnson that a planned cut in corporation tax from 19% to 17% would no longer go ahead. This put a halt to reductions in corporation tax rates stretching all the way back to the Thatcher era.

The rationale behind lower corporation tax rates has been to attract multinational businesses to the UK and to increase investment. However, research suggests that other factors matter more to companies than headline tax rates, and a raising of rates to 24% has been mooted.

There have been warnings from business groups that raising corporation tax rates could choke off a recovery. However, given that the tax is charged on profits it is not clear why this would be the case. Companies which have suffered losses would not be paying corporation tax in any event.

Interest deductibility

Interest paid on corporate debt is deductible against trading profits. There are restrictions on deductibility for the most highly geared companies, but the prevalence of debt financing has left some companies fragile in the face of economic shocks. There is a case to be made to remove the tax incentive to load companies with debt.

However, the time may not be right, as many companies have been forced to take on debt in order to make it through the coronavirus crisis.

The future?

The House of Commons Treasury Committee and the Office for Tax Simplification are currently both investigating potential changes to the tax system. Change seems inevitable, but it is unclear how bold the Government, bruised by its handling of the coronavirus crisis, will dare to be.


The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Aidan Roberson - Tax Manager


T +44 (0)20 7874 8845

Aidan helps company directors, partners and private individuals and families with their personal tax with an emphasis on inheritance tax. He enjoys bringing clarity to the complex problems which arise in these areas, providing people with clear, actionable advice.

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