Truss, Sunak and those shaky tax pledges
When I started working as a tax consultant more than 20 years ago, the theme of “taxes” would generally have attracted the public’s attention around the budget for a few days, only to be quickly replaced 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 at its highest level in 70 years.
Ten of the original 11 candidates for Conservative Party leadership led their campaigns with pledges over tax. Rishi Sunak, the former chancellor, was the clear outlier, ruling out tax cuts until public finances improve and inflation comes under control.
Now the last two contenders – Sunak and Liz Truss – offer the full 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 reinvigorate growth, with a range of proposals running up to around £40bn. First, it will cut fuel taxes by more than the 5p per liter cut already in place and temporarily suspend the green energy tax to help absorb rising energy costs.
In summary proceedings against her opponent, the foreign minister also promises an immediate reversal of the former chancellor’s 1.25 percent increase in national insurance (NI) and promises a planned increase in corporate tax to 25 percent. to cancel. from April 2023.
She has also said she wants to support working families by generously increasing the transferable marriage allowance to the level of the personal allowance.
Sunak, who started his campaign on a more frugal note, is now offering a temporary cut in VAT on household energy and a pledge to cut the base income tax rate to 16 percent, though it won’t take effect until 2029. He has also pointed to his latest announcements as chancellor – the raising of the NI threshold in July and his pledge to cut the base income tax rate to 19 percent by April 2024 – measures costing a total of £33 billion.
What do these plans mean for money in our pockets? Details on many pledges are vague – and could change daily – but Sunak’s commitment to lower the base income tax rate will be worth up to £377 a year for all employees compared to the current tax year.
Under Truss’ proposals for the transferable marriage allowance, a base rate taxpayer could be significantly better off with a tax benefit of up to £2,644 a year. It also offers universal tax benefits, with higher income earners benefiting from a tax cut of more than £2,000 compared to the current tax year – driven largely by the reversal of the 1.25 percent NI increase.
Sunak’s striking cut in income tax from 4 percent of the base rate will be worth up to £1,508 a year, but you’ll have to wait seven years to see that benefit. But is this just smoke and mirrors from Sunak’s team? Compared to the 2020-21 tax year, when he became Chancellor, someone making £50,000 will be just £276 better off – barely worth the seven-year wait.
So Truss seems to be the clear winner when it comes to putting money back into people’s hands quickly, albeit at an additional cost of £9bn compared to her rival. However, I have some important caveats.
Any changes cast as “emergency measures” will likely be rolled back at some point. As for the reversal of the NI surge, it’s hard to see a politician pushing this through for higher taxpayers – anyone making more than £50,270. In addition, it remains unclear whether employers will benefit from the reversal: Given that employers’ NI is now at 15.05 percent, this would be bad news for companies facing difficult trading months.
Another problem also arises from the timing of the reversal. If implemented immediately, as Truss promises, it would mean three different NI regimes will apply this tax year, bringing inevitable issues with PAYE codes and yo-yo effects on people’s monthly net pay. Could HM Revenue & Customs’ systems handle it? And can employers apply the right tax credits?
Tax aside, why has neither candidate proposed an increase in personal tax deductions and thresholds in line with inflation? Sunak’s sneaky move in his 2021 budget to freeze it until April 2026 has been exacerbated by inflation. If he wants to do “the right thing”, he should lead the way with a promise to increase these limits with inflation.
Few of the candidates’ commitments are likely to remain intact in terms of their impact on economic reality. When it comes to election promises, I’m still waiting for Boris Johnson’s pledge to raise the base rate threshold to £80,000, as outlined in the Conservative Party’s 2019 election manifesto.
So who’s right? I don’t really know what to believe – and I don’t believe it until I see it.
Nimesh Shah is CEO of Blick Rothenberg.