The impending departures of Theresa May and Philip Hammond are likely to lead to substantial changes in taxation within the next year. Part of the reason for this is the £26 billion” war chest” which the Chancellor has built up. The war chest is less tangible than one might first assume as it is the difference between the amounts that government could spend within the 2% of GDP deficit rule and the amount currently being borrowed.
Both the candidates for the Conservative leadership have promised tax cuts. Boris Johnson has promised to move the higher rate threshold to £80,000 from its current £50,000. They timescales been given for these change the so therefore the £9.6 billion” price tag” may be higher than the actual cost. It should also be noted that the rate of employees NIC will miss remain the same but the upper earnings limit will move up with the higher rate tax band threshold. This could cause some difficulties in Scotland if the higher rate threshold is not moved up as Scots would be paying 23% more tax up to £80,000 than in the rest of the UK.
Jeremy Hunt has proposed a reduction in the rate of Corporation tax to 12 ½%, which will compete with the Republic of Ireland’s rate. Previous reductions in corporate tax rates have encouraged companies to declare more of their profits as relating to UK source income and therefore, corporate tax receipts have increased. This may not be the case with the reduction of this magnitude.
One interesting element is that the tax changes in terms of cost to the Exchequer have been hugely dwarfed by spending commitments made in the Past couple of years, such as the extra £20 billion a year in real terms for the NHS. Moreover, if defence spending is increased as a proportion of GDP to say 3% that would also add another £15 billion per annum in spending commitments at current prices. In that context tax pledges are much cheaper to routine than extensive spending pledges.