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What happened to the UK wealth tax?

It’s no secret that the pandemic has had a huge impact on the UK’s finances, with the government looking to recoup the costs of various COVID-19 economic support packages. At the end of 2020, a newly launched independent think-tank called the Wealth Tax Commission published a report that pushed the idea of a UK wealth tax back into popular discussion.

The Wealth Tax Commission report suggested that restructuring the tax system is the most viable option, and that the government should be taxing wealth and other types of income instead of only increasing taxes on employment earnings.

Many economists think that such a wealth tax could be the solution to the UK’s soaring public debt and financial inequality crises. Yet none of the Chancellor’s budget announcements in the last two years has explored the concept – so what happened to introducing a wealth tax?

What is the wealth tax?

Technically, we do already have forms of wealth tax in the UK, such as Inheritance Tax (IHT) and Capital Gains Tax (CGT). Nonetheless, there are undoubtedly very wealthy people with highly valuable assets that are not being taxed efficiently, if at all.

The idea of taxing wealth has been floating around for decades, but the wealth tax
specifically suggested by the Commission would be a one-off charge that could raise enough funds to offset the estimated cost of the COVID-19 pandemic on the public purse.

The Commission’s recommendation was to apply the wealth tax on an individual basis, at a flat rate of 5% of any wealth over £500,000. This would cover total wealth, including property and pension values, and payable in annual 1% instalments (plus interest) over 5 years.

According to their calculations at the time, over 8 million individuals could be liable for paying this tax, which would raise £260 billion net. However, the latest estimates on public spending during the pandemic are closer to £410 billion – clearly requiring a different model.

Why does the UK need a wealth tax?

Even before the spiralling costs of the pandemic, growing wealth inequality was increasing the gap between the richest and poorest people in the UK. At the same time as the Wealth Tax Commission published its report, the Joseph Rowntree Foundation also published a report on destitution.

This report found that over a million households were unable to afford 2/5 of essentials (food, heating, lighting, clothes, and hygiene) at some point in 2019. Earlier this year, the Office for National Statistics (ONS) published the results of the Wealth and Assets Survey, finding that the wealthiest 10% consistently held almost 50% of the nation’s wealth between 2010 and 2020.

The richest individuals have a median net wealth in the hundreds of thousands, including property and private pensions, with a median bank balance of £90,000. By contrast, the poorest have a median net wealth of zero, with less than 50% owning property or having a pension pot. This means that more than half of the poorest people have significant debts that outweigh their savings.

As the cost of living continues to rise, with inflation outpacing wages, energy prices rocketing, and National Insurance Contributions increasing next month, the growing pressure on the poorest families could push even more people into poverty – but a wealth tax could ease this pressure.

How would a wealth tax affect me?

Initially, the thought of more taxes fills the average taxpayer with dread, but a wealth tax is only likely to target a relatively small percentage of taxpayers. If the government were to implement the Wealth Tax Commission’s proposals, they would only apply to those with more than £500,000 in accumulated wealth, and the tax would only apply to any wealth above this amount.

As the majority of Brits have not amassed £500,000 or more, such a tax would affect most people not in the top 10% by actually easing their financial strain. If the government sourced funding from excess wealth rather than increasing taxes on the limited income of the poor, this could help to prevent the potential poverty crisis that currently looms over most of the British public.

There’s also the issue of fiscal drag or ‘stealth tax’. With Income Tax thresholds frozen until 2026, if wages increase along with inflation then at least a million people could find themselves dragged into a higher tax bracket and suddenly having to pay at least 20% more tax. Without the freeze, the tax thresholds increasing would most likely have kept them in the same tax band as before.

While people tend to be wary when it comes to taxes, the idea of a wealth tax is actually fairly popular amongst Brits. Back in 2020, a poll by global research company Ipsos
found that 41% of respondents ranked a wealth tax as the most preferable option over cutting public services or increasing other taxes instead (such as Council Tax, Capital Gains Tax, Income Tax, or VAT).

Will the UK government introduce a wealth tax?

No UK government has ever implemented a wealth tax, and it does not seem that the current government will, either. The closest this came to happening was in 1974, when the Labour Party promised to introduce an annual wealth tax, but did not do so before leaving office in 1979.

Chancellor Rishi Sunak is against a wealth tax of any kind, but even a one-off tax like the policy suggested by the Wealth Tax Commission could be successful. However, one of the biggest issues with enforcing such a levy is categorising and valuing wealth, because not all assets are liquid.

At any rate, the Conservative Party has made no mention of current or future plans to introduce any kind of UK wealth tax. It would be far more likely for them to increase Capital Gains Tax rates before the end of their current office term (while Inheritance Tax rates will remain frozen until 2026).

If you have any concerns about your income, savings, or taxes, the highly qualified accountants at GBAC
would be happy to help you with financial planning and management. Simply call us on 01226 298 298, send an email to info@gbac.co.uk, or browse our website to learn more about our services. Our accountants in Barnsley, Leeds and Sheffield will be delighted to help.