'To go further with higher taxes is politically difficult and wrong'

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'To go further with higher taxes is politically difficult and wrong'

The statement will come against a backdrop of inflation being expected to reach around 8 per cent in April, a 1.25 percentage point national insurance and dividend tax hike and the lifting of the energy price cap in April, which mean steeply rising bills for many this year.

The chancellor will have a difficult task in balancing public finances with supporting growth while some have called on next month's tax rises to be postponed.

The Institute of Fiscal Studies predicted he might need to pledge more than £12bn on top of the £9bn already committed to protect households from higher prices.

Anthony Villis, managing director of advice firm First Wealth, shares his hopes for the Spring Statement and explains why going much further with higher taxes is "politically very difficult and wrong".

Anthony Villis, managing director, First Wealth

FTA: What are your hopes for the Spring Statement?

AV: A package of measures that encourage entrepreneurs and business. It’s a difficult balance, as we have huge pandemic debts to pay back, but we need to encourage wealth creation and not stifle long term growth. Some reduction on the planned 25 per cent corporation tax increase would be welcome, but unlikely.

FTA: Which tax policy is the most helpful for financial planning?

AV: Working with entrepreneurs, we find the enterprise investment scheme particularly useful. Business owners tend to understand and appreciate the risks involved, but are also happy to back relatively new ventures with a solid business plan and strong team that need to access capital.

The 30 per cent income tax credits and ability to carry back relief is incredibly useful in planning, so to the loss relief for investments that fail. First Wealth uses EIS to offset dividend tax for clients, and where business owners have exited and have previous income tax liabilities to consider. 

FTA: Which tax policy do you find the most disruptive?

AV: The annual allowance and lifetime allowances taxes are both complex and deter savings for the future. If HMRevenue & Customs wants to reduce total tax relief, then move the rate to a standard rate of relief for everyone, not cap lifetime value of pension pots.

Ultimately, we need to encourage people to provide for themselves, and rely less on the state. The complex mess of pension legislation helps this ambition in no way.

FTA: How do you help clients get around the tapered annual allowance?

AV: First, just by helping clients see that they have an issue. Due to the complexities of the rules, many people don’t even realise there is an issue until they receive an unexpected and unwanted tax bill in the post.

The next step is to reduce contributions accordingly to avoid taper relief. This is relatively easy if you are self-employed or run your own company. If you are employed you can talk to your employer about offsetting the reduced contribution through higher salary, some will help accommodate this request.

Then make sure that the reduction in contribution into your pension is being saved somewhere else. Isas are the obvious first point of call, but after that a general investment account, EIS or VCT would also work well.

FTA: How are you planning around the 1.25 per cent extra dividend tax?

AV: With clients who have excess cash on the balance sheet, we’ve been encouraging them to take additional dividends ahead of the tax hike. We then use a combination of VCT and EIS planning to offset the tax due.

Granted, the money is tied up for five or three years respectively, but if the cash was excess in the first place, this shouldn’t cause any personal cashflow issues to the client. As with all financial planning, understanding future income and expenditure requirements is crucial to success.

FTA: Given the economic damage the pandemic has caused, how do you think tax policy in the UK is going to develop over the next five and 10 years?

AV: Higher tax bills for both companies and individuals have already been announced, and I can’t see this changing. The huge squeeze on living standards, with the high inflation we're seeing means the opportunity to go much further with higher taxes is politically very difficult and wrong.  

The challenge for the chancellor will be to balance a tax system that has some impact on borrowing but encourages growth.

With interest rates low, and government bond yields still low, there is an opportunity to continue to fund spending through debt, rather than fully offset through higher taxes. The higher levels of inflation will also help with the real value of this debt.

FTA: How big an impact will the Ukraine conflict have on future tax policy?

AV: As long as Nato doesn’t become directly involved, the main impact will be around higher energy prices, which were already a big issue before the invasion of Ukraine.

The government must provide a progressive energy subsidy to people on lower incomes. A blanket loan makes no sense, the help needs to go to people who most need it. I don’t believe in windfall taxes, as it changes the landscape for businesses, and will ultimately impact internal investment.

The government should use this opportunity to encourage energy firms to use more of their profits to invest in green tech which will ultimately benefit everyone.

FTA: What are you telling your clients about this?

AV: Clients are understandably shocked and appalled by what’s happening. From an investment perspective, we rely on an evidence-based approach to investing, so the simple answer is for clients to take action and wait for investment values to recover.

There are times in life when the triviality of modern life seems unimportant. The unprovoked invasion, the killing of civilians and children and the humanitarian disaster unfolding is one of those times.

FTA: What’s your tip when it comes to mitigating the tax impact for your clients?

AV: For business owners, using the 30 per cent income tax relief on enterprise investment relief investments to plan. By moving more income to dividends rather than salary, you move away from a taxed at source system, and one where tax is due in the future.

If you combine EIS carry back relief, this is an incredibly successful way of ‘getting ahead’ of future tax liabilities, and you can start to reduce payments on account.

carmen.reichman@ft.com