The cost of the personal tax cuts

As politicians vie for votes in the leadership race from their colleagues and, in turn, the Conservative party membership, many are setting out their effective manifesto pledges on tax policy. We consider some of the key personal tax policies that have been suggested and look at their cost and what they mean to average taxpayers.

Cutting income tax 

A number of candidates have suggested cutting the basic rate of income tax from 20% to 19% or 18%.  

Income tax is one of the Treasury’s big hitters in terms of raising revenue. It accounted for £228 billion of the total £916 billion collected in tax in the year to 5 April 2022, nearly 25%.

As tax cuts go, reducing the basic rate of income tax will be incredibly expensive. Latest statistics show the annual cost of a 1% cut would be £5.25 billion and a 2% cut would be £10.5 billion if introduced on 6 April 2023.

It is an eye-catching and a relatively simple measure to implement but its benefit will be heavily diluted as it is spread across all taxpayers. If we take the average salary to be £26,000 per annum, a 1% income tax cut would result in a saving of £134 and a 2% cut would result in a saving of £269.

Scrapping the Health and Social Care Levy

Some have also mooted scrapping the Health and Social Care Levy, the 1.25% tax on income that will be paid by many workers and employers next year. If this was scrapped from 6 April 2023, it could cost the public purse over £17 billion.

Such a measure is unlikely to significantly benefit average households and families. The statistical evidence published at the time the Levy was announced suggests that it is the highest-income households that will be hit hardest by it. The 20% highest-income households will contribute more than 40 times that of the 20% lowest-income households. 

Personal allowance

If the above options are too costly for the benefit they provide, what might be done instead? A more focused approach, and one taken by successive governments, is to increase the income tax personal allowance.

High earners do not benefit from a personal allowance as it reduces down once an individual’s income exceeds £100,000 in a tax year. It is less flashy but an increase in the personal allowance would provide a similar benefit to an income tax cut for the majority of people at a lower cost. Increasing the personal allowance by 10% on 6 April 2023 from £12,570 to £13,827 would cost £8.4 billion.  

Individuals with an average income of £26,000 would receive a tax saving of £251, a little less than if a 2% income tax cut was introduced but saving the Exchequer £2.1 billion. If this saving was used to increase the personal allowance further, it would result in a tax saving to an average earner of £312.  

So, a cut in income tax rates may be stylish but lacks substance for delivering tax savings to those who might need it most. Similarly, scrapping the Health and Social Care Levy would disproportionately benefit higher-earning households. It may not be the best strategy to attract votes but the tried and tested route of increasing the personal allowance could be the best option for the public purse and deliver a similar result for many.