Press Room

4 Jan 2021

The UK – Paying for Covid with tax rises: what are the least bad options?

James’ article was published in Accountancy Today, 6 January 2021, and can be found here.

With the bill for Government support during the Covid crisis already high and likely to rise, there will naturally be a time for a reckoning. While it is hoped that some of these costs can be funded through economic recovery, increased productivity and targeted spending cuts, it is only realistic to expect that some of the bill will need to be paid through tax rises.

Tax rises are never popular, so it will always be a case of finding the least bad option. But what does this look like? We would suggest that the “ideal” tax rises would have the following characteristics:

  • they should not be harmful to the economic recovery;
  • they should be fair: for example, they should not seek to tax for a second time income or gains that have already been taxed;
  • liabilities should be simple to understand and calculate;
  • they should not be capable of easy avoidance by behavioural change or restructuring;
  • they should fall in the right places: on those who have done best through the crisis and can afford to pay and away from those who are experiencing difficulties; and
  • any risks from the increased tax should be more than offset by the potential revenue raising capability.

The focus of discussion in the media to date seems to have primarily focused on:

  • raising income tax or VAT;
  • increasing the rate of CGT and other tinkering; and
  • imposing a “one off” wealth tax.

We think all of these are bad ideas and fail to meet at least one, and in some cases many more, of the “ideal” conditions we mention above.

Raising income tax and/or VAT is simple to implement, calculate and understand and, as these taxes are widely paid, could raise significant revenue. However, they are very blunt instruments and would disproportionately impact those already struggling, particularly given the likely size of the rises that would need to be made to raise sufficient revenue. By reducing individual disposable income they would also hamper economic recovery.

Increasing the rate of CGT, potentially to income tax levels, would again be simple to implement and understand. However, it would have relatively low revenue raising capability and would be relatively easy to avoid (e.g. by deferring disposals or by ceasing to be UK resident). It also carries an unquantifiable risk of hampering economic recovery which, given the relatively low potential revenue raise, should be avoided at all costs.

The wealth tax as proposed is just an unequivocally bad idea. It is, in many cases, double taxation, and throws up some complex valuation issues in relation to illiquid assets (particularly property, unlisted shares and chattels) as well as funding problems in respect of these illiquid assets, which typically form a large part of many individuals’ wealth. It cannot be right to expect people to borrow to pay a tax.

So if all of these are bad ideas, what can we propose that is any better? A good starting point of principle would be to look at areas where individuals have previously enjoyed tax relief and, on a strictly short term basis, claw back some of this relief. Similarly, identifying beneficiaries of the Covid crisis and targeting additional tax at these individuals and organisations would seem to be more equitable than across the board targeting. With this in mind, we think the ideas set out below merit further investigation.


A great deal of the wealth of the UK population is held in private pension funds. Estimates of the total amounts vary, but generally run into the trillions. A relatively low levy on these funds could have a very significant revenue raising impact.

Given the levels of volatility that equity markets have experienced over the last 9 months, a levy of, say a 1%, may scarcely be noticeable to most. It could, in some ways, be likened to an additional management fee. For defined contribution plans, the valuation and calculation of the liability is clear. Provisions could permit the pension plan to pay the tax so there are no liquidity issues and the payment is being made out of tax relieved income so is less unfair than a blanket wealth tax.

For defined benefit plans, the valuation is a little more complex – but not much. One could calculate the transfer value of the plan, take the required 1% of this and equate this to a haircut of pension income (say £20,000 to £19,800 per annum). This should, of course, be applied equally to public sector pensions.

Finally, the thorny issue of tax relief on pension contributions could be addressed again, with perhaps a temporary, and we mean temporary, erosion of the ability to claim full tax relief. The problem with this is that it may simply trigger behavioural change and incentivise individuals away from pension savings, which is a bad long-term direction to be taking.

The pill could, and we think should, be sweetened by providing some additional tax relief on distributions from the plan, perhaps by an increase in the tax free lump sum that can be drawn from the pension to reflect contributions to the Covid bill.


Although ISAs are purchased out of taxed income; any income or capital returns are tax-free. This relief could be partially clawed back by a relatively small one off levy on uncrystallized ISA gains. Again this should be relatively easy to value and any payment is from income/gains that would not otherwise be taxed so is less inequitable. The payment could be made from partial redemption and could be administered by the investment manager, so should not lead to undue complexity at individual taxpayer level. Realistically, given the low interest rates currently available, the burden would be expected to fall primarily on stocks and shares rather than cash ISAs.

Covid Windfalls

While many businesses have struggled through Covid, particularly those that have been forced to close, or those that operate in the hardest hit sectors, there can be no doubt that for some businesses Covid has been a time of opportunity.

Consideration could be given to introducing a windfall tax on super-profits where it can be demonstrated that these have flowed from the Covid pandemic. In our view, this could justifiably be set at quite a high rate (perhaps 10%) that would still be lower than the main rate of corporation tax in recent memory (which sat at 30% as recently as 2008).

Of course, there could be some complexity as to who is classified as making “Covid super-profits”. Some organisations will be obvious (such as PPE suppliers, vaccine producers etc). Others may be less so. For example, an online retailer may have experienced a spike in profits partly due to Covid and partly due to other unrelated innovations. Designing a pragmatic mechanism to ensure as fair a method as possible of attributing profits to Covid related benefits may not catch all those who have benefited but could pick up a reasonable proportion.

Clawback of government funding

Some businesses have navigated the crisis without recourse to Government funding. Others have been forced to rely heavily on public money to meet their wage bills. Of course, this is in no way the fault of these latter businesses, but when the time comes to pay for the Government intervention, it is arguable that it is those that have benefited most from it should pay their share. This would only be payable on profits above a certain threshold, so should not impact those businesses still struggling to recover; only those that are, hopefully, out of the woods.

This could be argued to be philosophically no different from the seemingly acceptable principle of asking students earning above a specific level of income to repay, through an income tax surcharge, some of the costs of their university tuition. Using this analogy, a surcharge could be set at an equivalent amount to that contributed by graduates (currently 9%).

The possible liability to this surcharge could continue for a potentially long period to give businesses the chance to recover. Clearly, the surcharge would cease once all Government sourced finance had been repaid (potentially, following the graduate analogy to its conclusion, together with interest of up to RPI plus 3% per annum).

Corporation tax deductions for share plans

For employee share plans that meet certain qualifying conditions, the employer is entitled to a deduction against its profits for corporation tax purposes equal to the amount of gain realised by the employee. There does not need to be any cash cost incurred by the employer in funding these awards so, in some senses, this is a free deduction. Although there should be an accounting cost of delivering these awards, this does not necessarily equate to the deduction that is received, as in many cases the accounting charge will be calculated on a different basis (and may be higher or lower than the statutory deduction). For companies with large share price growth, the statutory deduction can have a material impact on the amounts of corporation tax paid, sometimes wiping out the bill entirely.

The rules relating to share plan deductibility could be adjusted either to move to an accounting basis, a hybrid (a deduction on the lower of accounting costs or statutory basis) or a temporary disallowance of share plan deductions altogether. This would have the impact of increasing the corporation tax take without affecting the cash position of the employer.


In our view, there is no single silver bullet that solves the problem of using tax to pay for Covid costs whilst being in any way equitable. We are concerned that the blunt tools currently being mooted could cause material collateral damage on an individual and/or wider economic level. We therefore think that a selection of the above ideas should be considered. In our view, these suggestions meet all or most of the criteria for an “ideal” tax that we have proposed and are capable of being viewed as targeted at those who are most able to contribute.

As we indicated in the introduction, we in no way wish for tax rises, but if tax rises there must be, then let’s at least try to make them as painless as possible.

If you would like to discuss any of the issues raised in the above article, please contact James Paull.

James Paull

James Paull

James is Head of the Incentives group at Andersen in the United Kingdom. He provides advice in respect of the deign, implementation and operation of employee incentive arrangements to companies, partnerships and individuals with a particular focus on tax, legal and technical aspects.

Email: James Paull