- No increases in income tax rates
- No increases in VAT - nor an extension of its scope
- No increases in National Insurance - nor an increase in its ceiling above the higher rate threshold
Those three raise three out of every four tax pounds. So what might he do to bring the deficit down to zero by 2019 as also promised?
Income tax
On income tax his hands are tied further. Not only will it not increase, but £7 billion will be spent raising the personal allowance from £10,600 this year to £12,500 by 2020/21 and raising the threshold where higher rate 40% tax starts from £42,385 this year to £50,000 in 2020/21.
Two other pledges on income tax also constrain him.
- The rise in the higher rate threshold will never be lower than inflation (expected to mean CPI).
- The personal allowance will always be sufficient to ensure that no-one working 30 hours on the minimum wage will pay income tax.
As I explain in Income Tax Cuts Ahead the personal allowance and higher rate threshold will have to rise significantly over the next five years. And there is little wriggle room for any extra take from income tax.
VAT
The Manifesto promise of no VAT increase was extended by the tax pledge to mean no extension in its scope either. So £41 billion of tax saved by zero rating food, new dwellings, domestic passenger transport, books (on paper), newspapers, and magazines, children's clothing, water and sewerage services etc are all safe. As is the 5% rate on domestic energy. And the exemption of domestic rents (cost £4.35bn), private education (£3.8bn), private health services (£2.95bn), finance and insurance (cost £4.5bn), and others is safe.
Oh, and there won't be another pasty tax - charging VAT on pies sold above ambient room temperature proposed and then all but withdraw in Budget 2012. That would definitely be an extension of its scope. A move the chancellor told me on Money Box on 2 May was 'a mistake' which he had admitted.
National Insurance
At the moment there are two rates for employees. 12% of earnings from £155 to £817 a week (equivalent to £8060 to £42,484) and 2% on income above that. In other words, just as the rate of income tax rises from 20% to 40% the rate of NI falls from 12% to 2%. The tax pledge made it clear that link would continue as the income tax higher rate threshold rises to £50,000.
A lower rate of NI for employees in some pension schemes ends from April 2016. And the self-employed pay in a different way. They pay Class 2 - a flat rate £2.80 a week Class 2 which gives entitlement to state pension. On top of that they pay Class 4 contributions of 9% of earnings between £8060 and £42,385. This 9% rate is lower than the employee rate because self-employed people cannot pay into SERPS or state second pension. But from April 2016 state second pension will be ended and the basic state pension will be around £35 higher than it is now.
From April 2016 Class 2 contributions will be abolished and rolled up into Class 4. So that rate of 9% will have to rise slightly which in any event will stretch the no rises in NI pledge. So could it be stretched further to raise the 9% rate a bit further towards 12%?
Other taxes
The taxes that are left are a long list of things which generally bring in relatively little and some of which are highly unlikely to be increased. So how might the Chancellor raise other tax income?
- Corporation tax? Brings in £42.3bn (2014/15) but is falling to 20% from April. Irreversible politically.
- Bank Levy? Collected £2.7bn but HSBC already using it as a reason to threaten to quit the UK.
- Inheritance tax? Nope. Its £3.7bn take will fall under plans to introduce a special exemption for the family home.
- Petrol and diesel tax? £27.2bn a year but would be seen as anti-business, anti-rural, and anti-consumer. The above inflation escalator has already been scrapped and inflation rises cancelled. Unlikely.
- Vehicle Excise Duty (£6bn) is very out of kilter as emissions fall and new vehicles pay less. Time for a rebanding or restructuring.
- Capital Gains Tax (£5.8bn) one of George Osborne's first reforms in 2010. Could be due another look. But the £13.3bn exemption for gains on the main home unlikely to be changed.
- Stamp Duty Land Tax (£10.7bn)? Unlikely as it has only just been reformed.
- Stamp duty on shares (£3bn) unlikely to change
- Tobacco duties? They brought in £9.5bn in 2015/16 and could be extended to e-cigarettes
- Alcohol duties brought in slightly more £10.5bn but tax on spirits, beer, and cider have recently been cut and wine duty frozen.
- Air passenger duty (£3.2bn) has recently been restructured and cut.
- Insurance premium tax (£3bn) is a possibility
- Landfill tax, climate change levy, and aggregates levy (£3bn) could be sold as a green measure but anti business
- Betting and Gaming duty £2.1bn - popular but would need further action to prevent offshore avoidance.
- Customs duties raise £3bn but scope for significant rises limited.
Negative taxes
Tax credits - paying money to low income households - cost £29.7bn in 2014/15, slightly more than the year before. Despite five years of cuts the Government spent £2bn more on tax credits in 2014/15 than in 2009/10. Further cuts would have to be very tough to save money.
Child benefit - where promises not to change have been made but are slightly vague - cost £11.5bn. Possibly some scope for cuts there.
Version 1.02
13 April 2015
