Taxes could rise in next five years, experts warn

Top economist thinks subdued economy and demand for public spending means increased levies.

Taxes could be hiked beyond pre-pandemic levels in the coming years, a leading economist has warned.

Paul Johnson, head of the Institute for Fiscal Studies think tank, warned that the coronavirus pandemic means there will be less money for public spending, meaning more tax rises.

Chancellor Rishi Sunak is reported to be looking at ways to plug the growing UK deficit and repay financial support given during the coronavirus crisis.

Johnson told MPs on the Treasury select committee this week that the economy will be smaller in the coming years due to the pandemic, meaning lower tax revenue.

However, he says there will be increased demand from the public for spending on other areas.

He says: “It seems unlikely we will accept the same level of spending on health, education and social care as before.

“I would be surprised in five years if taxes as a fraction of national income were not higher than pre-pandemic.

It comes ahead of the Budget next month, when Sunak will have the first opportunity to outline tax changes to repay state support during the Covid-19 outbreak.

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Dhana Sabanathan, a partner at advisers Winckworth Sherwood, says: “Many wealthy individuals have fast-tracked their tax and estate planning during the pandemic.

“This is partly due to an increased focus on their mortality, but also due to the inevitable question of how the UK government is going to balance its books, after its record-breaking spending to provide support to those affected by coronavirus.”

She says some see higher taxes as inevitable, but adds: “The UK is far from out of the woods with coronavirus, with many arguing that even more public spending is desperately needed.

“Indeed, some commentators, and even advisers, feel that it would be the worst time possible to introduce tax increases when so many individuals are struggling.”

Yesterday, experts warned the chancellor could be set for a tax raid on retirees or an end to the state pension triple lock to avoid breaking a Conservative Party pledge.

The Conservatives vowed during the last general election to not raise rates of income tax, National Insurance or value added tax, the so-called tax triple lock.

Sunak is reported to want to keep that pledge during his impending Budget.

But that could mean other taxes are hiked to pay off the UK’s deficit and recoup the cost of the government financial support provided during the pandemic.

Steven Cameron, pensions director at Aegon, warned that while some taxes may not be raised, the chancellor is free to scrap the National Insurance exemption for retirees or even remove higher-rate tax relief on contributions for pension savers.

He also warns that a commitment to the tax triple lock might make it harder to also provide the state pension triple lock. This currently increases state pensions at the highest of inflation, earnings growth or 2.5% a year.