After record stock market rises and falls, and billions of pounds of borrowing, the UK is emerging from lockdown.

As people return to work – and pubs and restaurants – Chancellor Rishi Sunak delivered his Summer Statement this month.

He announced reductions in VAT and the government’s ‘eat out to help out’ plan among other measures designed to aid a swift economic recovery.

But will it be enough? What will the recovery look like? And how else might the government look to recoup its economic losses?

UK economic recovery: the options

The Office for National Statistics (ONS) recently confirmed that UK GDP fell by 10.4% in the three months to April 2020. The Telegraph, though, reports that there is ‘now ample evidence that April was the trough, and that activity picked up sharply in both May and June.’

Whether or not the economic recovery has begun, there are four main shapes it could take.

  • V-shaped recovery

This is the shape the government will be hoping for. A quick and symmetrical return to pre-pandemic levels. The UK had a strong economy and stock market before the coronavirus lockdown. That could point to this V-shape being the most likely outcome.

  • U-shaped recovery

This is a similar return to pre-pandemic levels but over a longer period, with restrictions eased slowly and the economy returning to normal more gradually.

  • L-shaped recovery

An L-shaped recovery would be much slower.

A slower recovery might happen if local lockdowns like the one in Leicester continue to be imposed, forcing more businesses to remain shut for longer.

  • W-shaped recovery

After an initial quick – and almost V-shaped recovery – the economy would be hit by a second coronavirus wave.

If the reopening of businesses, bars, and restaurants happens too quickly or not in a Covid-secure way the initial boon to the economy could be ruined by a return to lockdown.

How will the UK look to recover its expenditure?

After months of borrowing and huge expenditure – on the Job Retention Scheme and Business Interruption Loans, to name but two – the UK’s debt is now larger than its economy.

The situation is not completely without precedent. A similar economic situation faced the country at the end of the Second World War. That period saw huge tax rises for top earners. Could we be about to see the same thing?

Taxes

If the Chancellor opts not to curb spending, he may look to increase taxation.

In the short term, we’ve seen the temporary reduction in VAT announced in the Summer Statement. But what changes might we see in the long term?

Income Tax, National Insurance, and VAT freezes were a Conservative manifesto promise so the government might be reticent to tamper with them. Higher taxes would also mean less money for us to spend, slowing the economy further.

Mel Stride, the Conservative Chair of the Commons Treasury committee recently said: “There will be very difficult choices, therefore, around spending on the one hand and taxation on the other.”

  • Inheritance Tax (IHT)

After World War II, IHT rose to 80%, peaking at 85% in 1969. Today, it stands at 40%.

Many experts were predicting amendments to IHT in Rishi Sunak’s first Budget back in March. The Chancellor chose not to make changes then but might find it harder to resist at the next Budget.

He could opt to increase the rate payable, reduce thresholds, or reform current reliefs.

The ‘seven-year rule’ could be abolished. Currently, any gifts you make are liable for IHT if you die within seven years of making them. Tax begins at 40% if you die within three years and then on a sliding scale until year seven.

Changes could also be made to the way unused pension assets can be passed on. Under current rules, you can usually pass on 100% of your unused pension wealth if you die before age 75.

  • Income Tax

During World War II the top marginal rate of Income Tax reached 97.5%.

Certainly, no one would suggest a rise to those levels is likely, but nor would we rule out an increase in the future, especially for those paying higher rates.

  • Property

Council tax bands haven’t changed in nearly 30 years. Could property be an area where the government looks to increase taxes?

There’s certainly no sign of that yet. The chancellor used the Summer Statement to announce a temporary holiday on Stamp Duty on the first £500,000, until next March. The holiday applies to all property sales in England and Northern Ireland.

The government will be hoping the move gives a much-needed boost to the property market.

Pensions

Pensions might also be on the Chancellor’s radar.

  • Tax relief

The government foregoes £21.2 billion a year through pension tax relief. A large amount of that is claimed by people earning more than £50,000 a year.

The Chancellor might make changes to pension tax relief for higher earners during his next Budget.

  • The ‘triple lock’

The ‘triple lock’ is under enormous scrutiny at the moment.

The triple lock is the system by which the UK Basic and New State Pensions rise by the highest of either 2.5%, average wage growth, or price growth, as measured by the consumer price index (CPI).

Coronavirus debt and the huge cost of the furlough scheme have put the triple lock under the spotlight, but the government has yet to be drawn.

A government statement, as reported by the BBC, confirms: “Announcements on tax and pensions policy are for Budgets. The government is committed to supporting pensioners.”

What might changes mean for you?

With the Summer Statement, the Chancellor has shown his intention to get the economy moving again. But huge levels of borrowing make changes to pensions and taxation increasingly likely during this parliament.

Whether through higher marginal rates of Income Tax for top earners, IHT threshold amendments, or changes to the triple lock, recouping Covid-19 expenditure will likely affect us all in the near future.

The only certainties are the allowances and thresholds that exist now.

At HA&W we can advise on how to make the most of tax-efficiencies and thresholds during the current tax year. We can also help you build contingencies into your long-term financial plan to guard against future changes.

Get in touch

Please contact us if you’d like to discuss any aspect of your financial plan and the impact of possible future changes.