As the Conservative leadership contest enters its’ final stages, it is worth considering how the imminent change in Prime Minister may affect the UK personal tax rates. While the debate has been dominated by Brexit, Boris Johnson’s plan to raise the point at which individuals start paying a higher rate income tax of 40% from the current £50,000 to £80,000, led to some fluttering in the media. He has since shifted his focus to those on low incomes but what impact would raising the threshold for higher rates of income tax have?
The main argument in support of this move is that more taxpayers are now subject to higher rates of tax than was ever intended. The Income Tax statistics produced by HMRC in recent years, appear to back this up, with the point at which higher-rate tax is paid not keeping up with wage inflation over the last 10 years, and the impact on families with children being greater still, following the clawback of child benefit on those earning more than £50,000.
However, it raises a number of questions on implementation. Chief among them is what would happen to the higher-rate threshold for National Insurance, which has also been aligned to £50,000? Were this to increase to £80,000, the potential saving would halve for affected taxpayers from a maximum of £6,000 to £3,000. The winners here seem to be pensioners who are exempt from National Insurance and those with large investment portfolios. Furthermore, Scottish taxpayers could potentially see an increase in their combined tax and National Insurance bill if the current SNP Government do not follow suit with the tax cut, as they have no power to change National Insurance rates. Adopting the proposals would also narrow the gap between the end of the 20% basic rate band and the start of the effective marginal rate of 60% at £100,000, potentially leading to renewed calls for further changes.
The Conservatives have historically been a party of low taxation, and it is good to hear something from the candidates’ policies in this area. It is certainly pleasing to see personal tax being seen as an important issue, given its direct effect on the pockets of the “squeezed middle”. However, while Boris may have got the media buzzing on this particular proposal, there are a number of potential complexities. The level of income tax rates and thresholds is a basic and important issue, a seed has been planted, so this is clearly one to watch. However, if you’re concerned about the effects of changes in personal tax, the best thing to do is to be ahead of the change and seek advice as soon as possible.