Taxes after the tax lock

The ‘tax lock’ expired with the end of the 2015-17 Parliament

During the 2015 General Election campaign both main parties made commitments not to increase the headline rates of the three taxes that are the three largest sources of government revenues: income tax, National Insurance contributions (NICs), and VAT.

The Conservative Party’s 2015 manifesto ruled out increases in the rates of all three taxes, and the then Prime Minister, David Cameron, made clear that this ‘tax lock’ also meant that there would not be any extension to the scope of VAT, or an increase in the ceiling set for the main rate of NICs by employees – the ‘Upper Earnings Limit’ (UEL). In its 2015 manifesto the Labour Party stated that it would not raise VAT, increase NIC rates, or put up the basic and higher rates of income tax, though it confirmed that it would reverse the Coalition Government’s decision to cut the additional rate of income tax from 50p to 45p.

The tax lock for income tax and VAT was put on a statutory footing by the Finance Act introduced after the Conservative Government’s first Budget in July 2015. A separate National Insurance Act set a ceiling to the main class of NICs, paid by employers and employees (Class 1), and capped the Upper Earnings Limit at the income tax higher rate threshold. In both cases the legislation set the tax lock to apply for the duration of the Parliament.

… a period during which a number of tax increases and tax cuts were made …

Over the last two years the Conservative Government has introduced a number of tax increases, as well as tax cuts. The former included hikes in higher rates of stamp duty land tax and insurance premium tax, and an increase in the effective rates of income tax charged on dividend income. In addition, some new charges were introduced – the apprenticeship levy and the soft drinks levy. Tax cuts included increases to the income tax personal allowance and higher rate threshold, a freeze in road fuel duties, and a cut in the rate of corporation tax.

… and one proposed tax rate rise was abandoned.

In his 2017 Budget on 8 March the Chancellor, Philip Hammond, announced that the rate of NICs paid by the self-employed – Class 4 – would be increased by one percentage point in April 2018 and in April 2019. Mr Hammond reversed this decision a few days later. Although the legislation setting the tax lock for NIC rates made no mention of Class 4 NICs, the Chancellor acknowledged that this measure would have breached the tax lock pledge.

Income tax, NICs and VAT remain the ‘big three’ national taxes …

Taken together, income tax, NICs and VAT account for around two thirds of total tax receipts. Since 2010 the share of receipts coming from VAT has risen, while the share from income tax has fallen. This reflects the Coalition Government’s decision to increase the standard rate of VAT from 17.5% to 20% from January 2011, and to increase the personal tax allowance in a series of steps from £6,475 in 2010/11 to £10,600 by 2015/16. Nonetheless the dominance of these three taxes remains.

… and putting up the rates of any of these raises much more than other potential rate rises.

Source: HM Revenue & Customs, Tax ready reckoner statistics, January 2017

Beyond the tax lock, what questions might now be on the Chancellor’s desk as to the future of the ‘big three’ …
  • The Conservative Government made a commitment to continue to raise the personal allowance and higher rate threshold to 2020. Is this a policy that should be continued, given the rising numbers of people who pay little or no income tax?
  • Unlike with other taxes, the scope of VAT is determined by EU VAT law. Post Brexit, the Government would have much more discretion in designing the tax. How might it exercise this?
  • In the 2017 Budget the Chancellor’s case for reforming NICs was that the tax base was being eroded by the rising numbers of people working as self-employed or through their own company. Is tax reform really feasible given the public opposition to the Chancellor’s initial plans? And if not, what other taxes might have to be increased to counter the Exchequer costs from these trends in the workforce?

This article is part of Key Issues 2017 – a series of briefings on the topics that will take centre stage in UK and international politics in the new Parliament. More Key Issues posts will be published on this blog throughout June, subscribe via the homepage to get instant alerts.

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