Taxes have become a hot topic at the election and the Tories want us to believe that Labor will increase your taxes by £2,000.
The Conservatives, on the other hand, position themselves as the party of tax cuts.
The problem is that not only have the Tories been raising our taxes for several years now – even taking into account National Insurance cuts – but after fourteen years in power they have left Britain with an incoherent mess of a tax system.
Rishi Sunak, Jeremy Hunt, Keir Starmer and Rachel Reeves all know this, but they prefer to ignore it and score cheap points over who will cut or raise taxes.
Oh yes, they will, oh no, we won’t: Keir Starmer and Rishi Sunak’s debate descends into a Punch and Judy-style row over whether Labor would increase people’s taxes by £2,000
This is foolish because this general election is the ideal time for both parties to promise to fix the mess and put us back on better footing.
My tax manifesto would include ending the stealth tax raid, abolishing the 60 percent income tax rate, rolling back the tax raid on investors and savers, and making some strong long-term commitments on pensions.
Stealth tax
The freezing of income tax thresholds, combined with high inflation, has led to a major tax attack.
It’s called a stealth tax, but it’s done blatantly. People noticed it a long time ago and are angry, but still we have a freeze on the thresholds until 2028.
By keeping the income tax threshold frozen at the basic rate, a larger share of people’s income is pushed to 20 percent tax.
At the same time, delaying the point at which people pay 40 percent taxes has resulted in record numbers of higher-rate taxpayers.
The Institute for Fiscal Studies says this ‘colossal’ stealth tax raid will result in 8.9 million people paying 40 percent taxes by 2028. That compares with 3.2 million in 2010, when Labor left office.
At the very least, tax thresholds should rise with inflation. This is fundamental for people who feel that the tax system is fair.
Tax trick: Freezing the higher rate threshold will suck many more people into a 40% tax rate
60% load drop
We have a top marginal income tax rate of 60 percent – and that’s not for the highest earners.
This is due to the removal of the personal allowance above €100.00 – for every additional €1 earned, 50 cents is removed from the tax-free personal allowance. That changes the income tax rate from 40 percent to a rate of 60 percent.
This is not collateral damage resulting from two things that interact, such as eliminating child support or paying off student loans. It is an integral part of the tax system and means that effective income tax rates are 20 per cent, 40 per cent and then 60 per cent between £100,000 and £125,140, before dropping to 45 per cent above.
Clearly this is a crazy way to structure a tax system. Meanwhile, the £100,000 threshold has not changed in the fifteen years since it was introduced. If it had risen with inflation it would have been £153,000.
Those with incomes over £100,000 are high earners, but there is no reason to treat them unfairly. The abolition of the personal deduction must be completely abolished.
Hero or villain? Jeremy Hunt warns of tax rises on labour, but conveniently ignores how he organized tax raids as Chancellor
Savings tax
The personal savings allowance was a welcome introduction, providing a tax-free £1,000 in savings interest. Although this was made needlessly complicated by reducing that to just £500 for higher rate taxpayers and giving nothing to 45p taxpayers.
But again: this is a grant that has not increased in years. Meanwhile, inflation soared and interest rates rose, meaning many more savers saw their interest trapped in the tax net.
The spike in the cost of living not only meant that people saw their savings eroded by high inflation that savings rates could not match, but the situation was made worse by taxes.
This is a sneak tax attack on the proceeds of savings that in most cases were probably taxed as income in the first place.
The personal savings allowance must increase substantially for everyone. I would make it at least €5,000.
Reverse the tax attack on investors
If you thought Rishi Sunak and Jeremy Hunt’s tax threshold freeze was bad, just wait and see what they did to the two most important tax exemptions for investors.
Hunt has reduced capital gains tax allowances from £12,300, to £6,000 and then £3,000.
He has also reduced the dividend tax credit from £2,000 to £1,000 and now just £500.
This is a direct attack on small investors. For the truly wealthy, the additional tax on their capital gains or dividends is a drop in the bucket; for small investors and retirees, it really matters.
The Chancellor had the audacity to stand up and announce the UK Isa and a Tell Sid-style sale of NatWest shares in his March Budget, claiming he wanted to give investors a boost, while going ahead with it.
It’s time to reverse this tax attack and allow benefits to rise with inflation.
Up and down: Gordon Brown introduced the lifetime pension allowance at £1.5 million and Labor increased it to £1.8 million – the Conservatives cut it all the way to £1 million and then abolished it
Pensions – clarity in the long term
‘Pension policy is about long-term decisions… stability is desirable.’
These are the words of the Institute for Fiscal Studies, which discusses the potential returns of the lifelong pension benefit.
This cap on the total value that people’s pensions could reach before high tax charges were abolished by Jeremy Hunt in March 2023.
The lifetime allowance was introduced by Gordon Brown and has always been problematic because it includes both pension contributions and investment growth.
It was introduced by Brown in April 2006 for £1.5 million and when Labor left power it stood at £1.8 million.
Confusing reports: Shadow Chancellor Rache Reeves has rejected claims of tax rises, but says she will bring back lifetime pension benefit
The Tories managed to massively worsen the problem by hacking back the lifetime allowance and it was just £1,073,000 when Hunt scrapped it.
That sounds like a lot, but at a standard 4 per cent withdrawal rate on an invested pension that’s £40,000 a year – less than the £43,100 annual after-tax cost of the PLSA for a comfortable retirement.
After Hunt abolished it, Rachel Reeves immediately said Labor would bring back the lifetime allowance, but has since declined to provide more details.
Will it come to £1.07 million, where Labor left it at £1.8 million, or some other higher or lower figure?
This kind of interference and lack of clarity damages confidence in the pension system and increases fears of other tax raids. It’s depressing to read the comments on our articles encouraging retirement savings, with so many readers saying there’s no point, the government will just try to take it away from you.
We need the parties to give us a clear path for pensions – from tax relief to the lifetime benefit – and then commit to leaving everything alone.
Restoring confidence in the tax system
These are just some of the many problems in our tax system and the problem with solving them is that there is already not enough money coming in to pay the UK’s bills.
Britain has borrowed on paper, but with interest payments on government debt significantly higher, this is no longer the cheap and easy option it once was.
We must therefore either raise more tax money, stop making expensive promises such as the triple lock on state pensions, or stimulate growth. The latter would obviously be preferable for most of us, who already feel our taxes are very high.
All parties must be honest with us about Britain’s finances and admit that without a major revival in growth we should not be cutting key income tax rates, national insurance and other key taxes.
But that doesn’t mean we can’t try to restore faith by fixing the underlying mess. We must start the next five years with a clean slate of simplified taxes and benefits.
We should treat people fairly when it comes to taxes because then they will be happier paying their fair share.
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