Raising tax and the Triple Lock
With recent press reports that the Chancellor, Rishi Sunak, is going to stick with the Conservative manifesto 'triple lock' pledge you may be wondering how he might raise tax at next month's Budget without actually raising tax rates.
To understand what he might do let's look at what he cannot. How does the triple lock constrain the Chancellor? The lock applies to the three largest revenue raising taxes: income tax (£195bn), NICs (£144bn) and VAT (£134bn). That makes up 57% of last year's tax revenue. Under the lock the Chancellor cannot raise the rate at which any of these taxes are charged.
With a projected budget deficit of £394bn how else might he fill the hole?
The Office of Tax Simplification's much publicised report on reform to the capital gains tax system contains one suggestion. That is to align the rate of capital gains tax (20%) with income tax (45%). This is a rate rise but falls outside of the triple locked taxes.
But by the report's own admission while this might theoretically raise £14bn taxpayers will rearrange their affairs so that 'nothing like this amount would be raised in practice'. At best, perhaps, rate alignment may offer a small dent in the deficit.
If the three big revenue raisers are untouchable and tweaks to the 'unlocked' tax rates are not the answer are there any new taxes that could be introduced? The answer is, of course, that there are but new taxes are not without their problems. Two recently discussed areas for new taxation are a wealth tax and a Covid 'windfall' tax.
Wealth taxes are notoriously difficult to design and collect (breaking two of the four principals of a good tax being certainty, equity, simplicity and efficiency). The Wealth Tax Commission's report suggested that any such tax should be collected over a 5 year period so not an immediate money raiser either.
We have seen windfall taxes before – the 1981 tax on banks and 1997 tax on the then recently privatised utilities - but a Covid 'windfall' tax on those businesses who have prospered during the pandemic seems difficult to design. How can the tax system identify in a simple way which businesses have thrived because of Covid rather than any other reason. Connection of course does not prove causation.
So where does that leave the Chancellor? The answer may in fact be relatively simple. Most taxes, including those that are part of the triple lock, have thresholds - before passing through which lower rates of tax apply - and exemptions - which may take a taxpayer's gain or income out of the charge to tax in part or in whole.
Freezing the income tax personal allowance and the threshold at which someone becomes a higher rate taxpayer (rather than letting them increase by CPI in the normal way) would, in the Institute of Fiscal Studies' Green Budget report, net the Treasury an estimated £7.6bn in extra income tax in 2022/23. And who remembers the introduction of the tapering of the income tax personal allowance in the 2009 budget? I suspect not very many people but it was anticipated to raise an extra £280m over two years. A good example of a rate raising measure that did not involve a rate increase.
As ever the devil is going to be in the detail so as well as listening to any headline grabbing measures in the Chancellor's speech on 3 March 2021 be sure to check the detail contained in the accompanying documents released once he has sat down. Or better still stay tuned to our Budget website to stay up-to-date on all the latest measures.