Election 2024 – what taxes could be raised?

Election 2024 – what taxes could be raised?

Jun 11, 2024

With the main parties promising to freeze income tax, NICs and VAT, Andrew Loan, partner, private client & tax, at Boodle Hatfield, says there’s plenty of other taxes that could be hiked to increase the tax base

The UK government currently brings in around £1 trillion in tax revenue each year, which equates to about 40% of GDP. Unsurprisingly then, tax – the amount and who it falls on – remains an important political issue.

Whilst we await the full manifestos for the 4 July 2024 general election, the major political parties have announced there will be no increases in the rates of income tax, national insurance contributions (indeed, many say they want to reduce the so-called ‘jobs tax’), VAT or corporation tax. If that remains the case, three quarters of the government’s tax revenues would see no increase at all.

But is it that simple?

There are a number of taxes that have not yet been mentioned, including capital gains tax, inheritance tax, stamp duty land tax, fuel and tobacco duties, council tax, business rates, and dozens of smaller taxes and duties.

And of course, tax rates are only half the story. Tax revenues are a product of tax rates applied to a tax base.

So, if rates are fixed, what is happening to the tax base? What about reliefs and thresholds?

Tax rates recap

As a reminder:

  • income tax is charged at progressive rates of 20%, 40% and 45% on most income (but slightly lower rates of 8.75%, 33.75% and 39.35% for dividends).
  • National Insurance contributions (NICs) are paid by employees at rates of 8% and 2%, by employers at 13.8%, and by the self-employed at 6% and 2% (with the NICs rates stepping down at the same point income tax moves from the 20% basic rate to the 40% higher rate, so in effect employment income is taxed at rates of 28%, 42% and 47%).
  • the standard rate of VAT is 20%, but some goods or services bear 5% VAT, and others are zero-rated or exempt.
  • the main rate of corporation tax is 25%, but small companies pay the 19% rate.

And to explain how we ended up here:

  • the additional rate of income tax was introduced at 50% in April 2010, and cut to 45% in April 2013.
  • the rates of NICs increased in April 2011, and temporarily increased again in 2022 by the short-lived ‘social care levy’ but were then cut back in the last two fiscal events – Autumn Statement and Spring Budget – before this election.
  • the standard rate of VAT rose from 17.5% to 20% in 2011.
  • corporation tax gradually fell over the decade from 2008 to 2018 from 30% to 19%, but then increased from 19% to 25% in 2023.

Is it all about the base?

Given the slow economy, very little sign of growth in productivity, and demands for the funding of public services from schools and hospitals to border force officers and defence, what options does a new Chancellor of the Exchequer have to increase tax revenues, if many tax rates are fixed?

There were announcements on proposed reforms of non-dom taxation in the Budget in March, which will result in the end of the remittance basis of taxation for non-domiciled individuals.

The two largest parties, Conservatives and Labour, both support proposals under which individuals coming to the UK after at least 10 years of absence will be taxed on their worldwide income and gains after four years of UK tax residence, and will be subject to UK inheritance tax on their worldwide estate after 10 years of UK tax residence.

That is one way to expand the UK tax base, by abolishing exemptions. (See Boodle Hatfield’s previous briefing on The end of the current ‘non-dom’ tax regime -what has been proposed?)

Restriction on reliefs

Another way to increase the tax take is through the restriction or erosion of reliefs. The annual exempt amount for capital gains tax was cut from £12,300 in 2022-23, to £6,000 from April 2023, and to £3,000 from 6 April 2024.

The income tax personal allowance reached £12,500 in April 2019, and was frozen at £12,570 in April 2021. Current government plans would see that freeze continue until 2028.

Even in 2024, inflation has eroded the value of that personal allowance by over 20%. The additional rate income tax threshold was lowered from £150,000 where it was set in April 2010 to £125,140 from April 2023, whilst the higher rate income tax threshold of £50,270 has not changed since 2020.

Over 14 years, inflation has risen prices by almost 50%, so the thresholds are about a third lower than they would be with inflationary increases.

In summary, years of fiscal drag have pulled increasing numbers of people into higher rate bands. Holding tax allowances steady produces tax rises by stealth.

Changing the tax treatment can also expand the tax base and increase the tax take without changing headline tax rates.

For example, abolishing the VAT exemption for private school fees could increase the tax take by expanding the VAT base (although some would argue that any increase in tax revenues would be substantially offset by parents moving their children to state schools).

Similarly, the income tax base would increase if, for example, the carried interest returns achieved by private equity executives are taxed as income rather than as capital gains.

If a government were so minded, significant sums could also be raised by changing the way that tax reliefs work. For example, higher and additional rate taxpayers currently claim relief for pension contributions and charitable donations at their highest marginal income tax rates.

Would a new government consider capping that tax relief at the basic rate, as was done for mortgage interest relief at source (MIRAS) in 1991 before it was eventually abolished in 2000?

And the other taxes?

The party announcements have focused on the four biggest taxes. So should we expect some movement in other less salient taxes? Will capital gains tax remain at 10% and 20%, roughly half the rate of income tax, or could the rates be aligned, as they were by Nigel Lawson in 1988?

Might there be some movement on the 40% rate of inheritance tax fixed since 1988, or the nil rate band fixed since 2009? And if the rate is cut and the threshold increased, might there need to be movement to cap important inheritance tax reliefs such as agricultural property relief and business property relief?

Politicians who currently have no plans to make these sorts of changes may find they develop them as the need arises.