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Analysis | The UK already has a nasty wealth tax


Inflation in the UK will be close to 10% this year and high single digits next year – the Office for Budget Responsibility says. You’ll want to find a way to avoid that. The bad news is that you will probably find that you can’t.

Retirees and welfare recipients discovered this week that their incomes will rise with inflation. That is beautiful. But the rest of the country is struggling. Real wages are falling (i.e. wages are rising less than inflation), and in the future you will have less of your income anyway: the income tax freeze announced in the fall statement will drag large numbers of people into a tax bracket . And on the higher end, quite a few will pay significantly more tax than before, even without a pay rise, as the 45% income tax threshold drops from £150,000 ($178,770) to just over £125,000.

Anyone who thinks they can maintain their real income through dividend payments will also be shocked. Sure, most companies aim to have their payouts rise with inflation (at least), but Chancellor of the Exchequer Jeremy Hunt has reduced the tax-free allowance to £1,000, and by 2025 it will have fallen to £500. 5,000. The levels at which the different tax levels come into effect will also be frozen.

So what’s left? Ah, you will think, I will strive for capital gains – that’s enough. It almost certainly won’t be. The autumn statement says the tax-free capital gains allowance will be reduced from £12,300 to £6,000 next year and then to £3,000 from April 2024. In the UK, capital gains tax (CGT) is not indexed to inflation – so you can (and will probably now) end up paying taxes on more than you earned in real terms.

Imagine buying an asset for $20,000. For simplicity, let’s say it’s one that doesn’t bring in any income, maybe 25 silver bars. For a decade, it’s been rising at a whopping 10% a year — which you’d expect, given that it’s used industrially as well as a history of built-in inflation protection.

So after 10 years your silver will be worth around £54,000 thanks to compound interest – a capital gain of £34,000. That is beautiful. Except your CGT fee has been reduced to £3,000. So you have to pay 20% CGT on £31,000. That amounts to € 6,200. Now you have a total of £47,800. That looks fine. But factor in inflation, and it doesn’t. If inflation had been 10% for those 10 years too (although the Bank of England predicts it will fall back towards the 2% target within a few years), you would need the whole £54,000 to get the same volume of goods that you could have bought for £20,000 ten years ago. But you don’t have £54,000. You have £47,800. Your real wealth has decreased by 11%. Annoying.

Next, imagine that your investment only paid back 5% per year. The sale of the silver raises £32,940. Your real wealth has dropped quite dramatically due to inflation. But you are still taxed. Your CGT bill is £1,988. You have £30,952. In terms of purchasing power you are more than 40% behind. (Note that even if inflation had been 5% per year, you would still be lower in real terms.)

A wealth tax has long been advocated in the UK. While you can of course stash some wealth in the UK pension and ISA packs, we already have some – and that’s no joke.

More from Bloomberg’s opinion:

• FTX hammers more nails into Crypto’s coffin: Lionel Laurent

• Hunt’s fiscal medicine won’t ease UK economic pain: Marcus Ashworth

• The UK could use a World Cup victory — for the economy: Andrea Felsted

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion on personal finance and investments. Previously, she was editor-in-chief of MoneyWeek and editor of the Financial Times.

More stories like this are available at bloomberg.com/opinion

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