During this Election 2024 campaign the main political parties are pledging to freeze income tax, National Insurance Contributions (NICs), and VAT, so we take a look at what other taxes might be increased to widen the tax base.
Currently, the UK government generates around £1 trillion in tax revenue annually, accounting for about 40% of the GDP. Unsurprisingly, the topic of taxation—how much is collected and who pays it—remains a crucial political issue.
While we await the full manifestos for the general election on 4 July 2024, major parties have declared that they will not raise income tax, NICs, VAT, or corporation tax rates. This means that three-quarters of the government’s tax revenues would see no increases. But is it really that straightforward? Could this really happen > We are not so sure !
Several taxes remain unmentioned, including capital gains tax, inheritance tax, stamp duty land tax, fuel and tobacco duties, council tax, business rates, and numerous smaller taxes and duties. Moreover, tax rates are just one part of the equation—tax revenues also depend on the tax base.
So, if tax rates are fixed, what will happen to the tax base? What about reliefs and thresholds?
Recap of Tax Rates
To recap:
- Income tax is charged at progressive rates of 20%, 40%, and 45%, with slightly lower rates for dividends.
- NICs are paid by employees at 8% and 2%, by employers at 13.8%, and by the self-employed at 9% and 2%.
- The standard VAT rate is 20%, with some goods and services bearing 5% VAT, and others being zero-rated or exempt.
- Corporation tax stands at 25%, though small companies pay 19%.
Historical Context
- The additional income tax rate was introduced at 50% in 2010, then reduced to 45% in 2013.
- NICs saw increases in 2011 and 2022, but recent fiscal events have cut these rates back.
- VAT rose from 17.5% to 20% in 2011.
- Corporation tax fell from 30% to 19% between 2008 and 2018, before increasing to 25% in 2023.
Expanding the Tax Base
Given the sluggish economy, stagnant productivity, and demands for public service funding, what options does a new Chancellor have to increase tax revenues if many tax rates are fixed?
Proposed reforms in non-dom taxation, as announced in the March Budget, could expand the tax base. Both major parties support taxing individuals on their worldwide income and gains after four years of UK residence and their worldwide estate after ten years.
Restricting Reliefs
Another approach to increase tax revenue is to restrict or erode reliefs. For instance, the annual exempt amount for capital gains tax was cut from £12,300 in 2022-23 to £6,000 from April 2023, and to £3,000 from April 2024. The income tax personal allowance, frozen at £12,570 since April 2021, will remain unchanged until 2028, eroding its value by over 20% due to inflation.
The threshold for additional rate income tax was lowered from £150,000 to £125,140 in 2023, while the higher rate threshold of £50,270 has remained unchanged since 2020. As a result, many taxpayers have been pulled into higher rate bands through fiscal drag, effectively increasing taxes without changing the rates.
Changing Tax Treatments
Altering tax treatments can also expand the tax base and increase revenue. For example, abolishing the VAT exemption for private school fees could boost VAT revenue, although it might lead to increased enrollment in state schools, offsetting the gains. Similarly, taxing carried interest as income rather than capital gains could raise income tax revenue.
A government could also cap tax reliefs at the basic rate, as was done with mortgage interest relief in 1991 before its abolition in 2000, significantly increasing tax revenues.
Potential Changes to Other Taxes
With a focus on the four biggest taxes, potential changes to smaller, less salient taxes should not be ruled out. Capital gains tax rates could be aligned with income tax rates, as they were in 1988. The 40% inheritance tax rate, fixed since 1988, and the nil rate band, fixed since 2009, might also see changes, potentially coupled with caps on reliefs like agricultural property relief and business property relief.
At the end of the day it will all boil down to the Election victors really not being able to decide what happens with numerous tax rates until they have a good look at the nations books once elected
Please do not hesitate to Contact Us for any personal or business tax advice you may need..