As the manifestos of the parties contesting the UK general election are published, we’ll be analysing them carefully to work out exactly what the tax proposals mean. Here are a few pointers to bear in mind.
In its 2015 Green Budget, the IFS noted that the last five general elections have been followed by net tax increases of more than £5 billion in today’s terms.
Most parties seem to be talking about raising taxes. Or freezing taxes. Or even cutting taxes for some people. Some parties seem to be very clear about what they would do with the money. Others don't seem to have costed proposals. Or even a particularly strong grip on numbers in general. Here’s a quick guide to the effect of adding 1 per cent to (or cutting 1 per cent from) the following key taxes, using figures published by HMRC. You’ll see that each of the three big taxes comes in at more than £5 billion:
- Income tax, all rates - £5.5bn;
- VAT standard rate - £6.0bn;
- All employee, employer and Class 4 National Insurance contributions - £10.38bn; and
- Corporation tax - £2.48bn.
Similarly, politicians in Westminster readily talk about the whole of the United Kingdom. Don’t forget that Scotland now has its own tax-raising powers in respect of income tax and the land and buildings transaction tax. We discussed these last week. This might sound academic but it has a real day-by-day effect in Scotland. Specifically, the idea of an income tax increase which will be used to fund the NHS (in other words, a hypothecated tax) simply doesn't make sense in the framework of Scottish taxation. The hypothecated tax rise for the NHS promised for a Westminster parliament wouldn’t have any effect in Scotland unless replicated by the Scottish government. Similarly, Northern Ireland has its own powers to set the rate of corporation tax with a rate of 12.5 per cent likely to apply from April 2018.
Staying with income tax, there have not been any suggestions of commitments to raise the personal allowance to a particular level by a target date. It's something to watch out for but bear in mind that increasing the income tax personal allowance by £100 costs the Exchequer £585m.
The scope of a tax and the rate at which the tax is charged are very different things. For example, a party might promise not to increase the standard rate of VAT (currently 20 per cent) but could subsequently move some goods from the reduced rate of VAT (currently 5 per cent), or even the zero rate, into the standard rate without breaching a manifesto commitment.
When it comes to National Insurance contributions, employers and employees pay these separately. If a manifesto promises not to increase National Insurance rates, you might reasonably expect that to cover employee contributions, employer contributions, self-employed contributions, voluntary contributions and Class 4 contributions paid on self-employed earnings. By contrast, if a manifesto promises not to increase employee National Insurance rates, then the party may be thinking that all other National Insurance rates are fair game once they are in power.
Recent history reminds us that sweeping promises not to increase rates may be severely curtailed when those promises find their way into legislation.
For more information please get in touch with George Bull, or your usual RSM contact.