Britain’s borrowing costs are rising. What does that actually mean for your money?
Taxpayers should pay as much attention to the small print of the next Budget as they do to its biggest announcements, writes tax specialist Arj Kumar
Following Andy Burnham’s first PMQs as Prime Minister, much of the political argument will inevitably focus on who is to blame for Britain’s economic position.
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For households and businesses, the more useful question is what happens next.
Government borrowing costs have climbed sharply, with 10-year borrowing costs reaching levels last seen in 2008 and 30-year borrowing hitting levels not seen since 1998. That matters because the more the government spends servicing its debt, the less room it has elsewhere. Tax is inevitably part of that conversation. During PMQs, Burnham was pressed directly on whether taxes could rise and declined to rule out future increases, saying he would not write the Budget at the despatch box. For taxpayers, however, the mistake would be to hear “tax rises” and assume that means the headline rate of income tax has to change.
Governments have plenty of ways to increase the amount of tax people ultimately pay. Thresholds can be changed or frozen, allowances can be reduced and reliefs can become less generous. Changes to capital gains tax, inheritance tax, property taxes or the way businesses are taxed can also raise significant sums without touching the basic rate of income tax.
We have already seen how powerful frozen thresholds can be. As wages rise while tax thresholds stay still, more income becomes taxable and more people can find themselves moving into higher tax bands. The number on the payslip changes even though the headline tax rate has not.
That is why taxpayers should pay as much attention to the small print of the next Budget as they do to its biggest announcements.
Rising government borrowing costs can also reach households through other routes. When yields on government bonds remain high, that can influence wider borrowing costs across the economy. Anyone approaching the end of a fixed mortgage deal, landlords refinancing properties and businesses looking for finance will therefore be watching what happens to rates particularly closely.
For people running businesses, another layer of uncertainty remains. Decisions around investment, taking income, hiring staff or selling assets can all have tax consequences, which means months of speculation ahead of a Budget can leave people wondering whether to act now or wait.
My advice is to avoid making major financial decisions based on a Budget rumour. Instead, understand your current position, know which allowances and reliefs you use and check the tax implications before making a significant decision. Acting quickly on speculation can sometimes create a bigger problem than the change you were trying to avoid.
The government also faces a wider issue. Tax policy changes behaviour because it affects whether people invest, grow businesses, buy homes, save for retirement and how much families have available to spend each month.
The Treasury therefore faces a difficult balancing act. It needs to raise enough money to meet its commitments while avoiding decisions that weaken the growth it needs to improve the public finances.
Before ministers reach for the tax toolbox, they need to understand where taxpayers already feel the system is putting them under pressure.
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Arj Kumar is a former PwC tax specialist and Co-Founder and Co-CEO of Taxd, an HMRC-recognised digital tax platform serving more than 25,000 paying customers.
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