When I started working as a tax adviser over 20 years ago, the theme of “tax” would generally have grabbed the public’s attention for a few days around the Budget, only to be quickly superseded by other concerns.
Fast forward to 2022 and the race to become the next prime minister has turned into the “great tax debate”. It is being fought in the shadow of rapid inflation, the worst cost of living crisis in a generation and the country’s tax burden riding at its highest level for 70 years.
Ten of the original 11 Conservative party leadership candidates led their campaigns with pledges around tax. Rishi Sunak, the former chancellor, was the clear outlier, ruling out tax cuts until the public finances improve and inflation comes under control.
Now the final two contenders — Sunak and Liz Truss — offer the complete spectrum on tax policy. Which candidate offers the best choice for the country and how will their plans — as far as we can tell — affect our finances?
Truss says she will cut taxes “from day one” to reignite growth, with a series of proposals that add up to around £40bn. First, she will cut fuel duty by more than the 5p per litre reduction already in place and temporarily suspend the green energy levy to help with rising energy costs.
In a slight against her opponent, the foreign secretary also pledges an immediate reversal of the former chancellor’s 1.25 per cent national insurance (NI) increase (the health and social care levy) and promises to cancel a planned increase in corporation tax to 25 per cent from April 2023.
She has also said she wants to support working families by generously enhancing the transferable marriage allowance to the level of the personal allowance.
Sunak, who began his campaign in a more frugal tone, now offers a temporary cut in VAT for household energy and a promise to cut the basic rate of income tax to 16 per cent, though this would not come into play until 2029. He has also pointed to his final announcements as chancellor — the increase in the NI threshold in July and his promise to reduce the basic rate of income tax to 19 per cent in April 2024 — measures costing a combined £33bn.
What do these plans mean for money in our pockets? Details are sketchy on many pledges — and liable to daily change — but Sunak’s commitment to cut the basic rate of income tax will be worth up to £377 a year for all workers compared with the current tax year.
Under Truss’s proposals to the transferable marriage allowance, a basic rate taxpayer could be significantly better off with a tax break worth up to £2,644 a year. She also offers universal tax benefits, with higher earners benefiting from a tax cut of over £2,000 compared with the current tax year — largely driven by the reversal of the 1.25 per cent NI increase.
Sunak’s headline-grabbing 4 per cent basic rate income tax cut will be worth up to £1,508 a year, but you will have to wait seven years to see that benefit. But is this just smoke and mirrors from Sunak’s team? Compared with the 2020-21 tax year, when he became chancellor, someone earning £50,000 will only be £276 better off — hardly worth the seven-year wait.
So Truss appears the clear winner when it comes to putting money quickly back into people’s hands, albeit at a £9bn additional cost compared with her rival. However, I have some important caveats.
Any changes cast as “emergency measures” are likely to be scaled back at some point. On the reversal of the NI rise, it is hard to see any politician putting this through for higher-rate taxpayers — anyone earning over £50,270. Furthermore, it remains unclear whether employers will benefit from the reversal: with employers’ NI now standing at 15.05 per cent, this would spell bad news for businesses facing difficult trading months ahead.
Another problem also emerges from the timing of the reversal. If carried out immediately, as Truss promises, it would mean three different NI regimes applying this tax year, bringing inevitable problems with PAYE codes and yo-yo effects on people’s monthly net pay. Would HM Revenue & Customs’ systems be able to cope? And will employers be able to apply the right tax deductions?
Tax aside, why has neither candidate put forward an increase to the personal tax allowances and thresholds in line with inflation? Sunak’s stealth move in his 2021 Budget to freeze these until April 2026 has been compounded by inflation. If he wishes to do “the right thing”, he should be leading with a promise to allow these limits to increase with inflation.
Few of the candidates’ pledges are likely to remain intact on their impact with economic reality. When it comes to electoral promises, I am still waiting to see Boris Johnson’s pledge to increase the basic rate threshold to £80,000, set out in the Conservative party’s 2019 election manifesto.
So who is right? I don’t really know what to believe — and I’ll only believe it when I see it.
Nimesh Shah is chief executive of Blick Rothenberg.