When Theresa May became Prime Minister earlier this month, she made a number of promises. One of those was explicitly about the future tax policy of her Government.
May’s promise was clear and made to large segments of the UK population. She picked out people who were born poor and expected to die prematurely, white working-class boys less likely to go to university, black people treated more harshly by the justice system, state school students less likely to reach top professions, women earning less than men, those suffering from mental health issues, young people finding it hard to buy their own home and ordinary working-class families.
To these people, she said: “The Government I lead will be driven not by the interests of the privileged few, but by yours. When it comes to taxes we will prioritise not the wealthy, but you.”
It would be prudent and fair to give May the benefit of any lingering doubt as to whether she means what she says. The statement is not precise and she is talking about a large proportion of the population – what her predecessor Gordon Brown called “the many, not the few”. But a reasonable conclusion could be that the richest top 5 per cent, even 10 per cent, should expect leaner times in tax terms. The top 1 per cent should certainly not expect too many favours.
Of course, May is a practical politician subject to a range of influences and pressures, so do not expect a socialist workers’ paradise any time soon. The Prime Minister also wants to keep the UK as a magnet for overseas business investment, so penal personal tax is unlikely to appeal. She also has a large annual public sector deficit to cover, even if she has postponed the target break even date. Tax rises seem likely but they will presumably be mainly aimed at the richer sections of society, if her speech means anything at all.
So where might the tax axe fall? If May and new Chancellor Philip Hammond really wanted to shoot Labour leader Jeremy Corbyn’s fox, they might raise the top rate of income tax. But 50 per cent tax rates would not play well with overseas investors and businesses deciding the merits of coming to UK.
Tinkering around with National Insurance might work: another 1 per cent on contributions could escape the worst criticism. A low rate of NICs on pensions or investment income above an initial threshold might also offset some of the comments about how well the relatively wealthy retired have done recently.
That said, the Government will hit tax pay dirt if the decision is to limit relief on pensions. The tax and NI costs of the pension reliefs are potentially huge. Cutting higher rate and additional rate tax relief on contributions could free up billions for the Exchequer. Eliminating NIC relief on employer contributions would provide even more. How much could be saved from setting a flat rate of tax relief would depend on the percentage that was finally agreed as fair.
It is always instructive to look at the way other countries do things. The US does not allow employees to deduct pension contributions against their social security payments – the equivalent of our NICs. Come to think of it, they do not allow retirees to take tax-free cash. The Americans do have one kind of pension scheme (called a Roth 401k or a Roth IRA) where there is no tax relief on the input and then no tax on the output when the pension is finally drawn. There is very little take-up for this kind of plan in the US and the idea seems unlikely to cross the Atlantic.
A possible sop to the higher rate and additional rate losers might just be some loosening of the rules on the lifetime allowance. It would probably cost little – at least in the short term – and would make life a lot simpler for many employers and employees.
Inheritance tax is a relatively small revenue raiser for the Government, although every little helps. Nevertheless, two of ex-chancellor George Osborne’s IHT-related initiatives could be in jeopardy under the new regime.
Indeed, it is hard to believe IHT-free defined contribution pension funds will continue to be allowed to cascade down the generations for very long. If pensions are set to be revamped yet again, this seems like a privilege that might not survive a big revision. In any event, advisers should be careful about giving long-term freedom from IHT as the main reason for making transfers from defined benefit pensions.
Another possible causality might be the fiendishly complicated principle residence nil rate band that is gradually being introduced year by year. Maybe it will be abolished altogether as part of the new tax priorities.
Or perhaps the special relief will be converted into a proper increase in the nil rate band to offset some of the more upsetting things May and Hammond have in the pipeline for us.
Danby Bloch is chairman at Helm Godfrey