Upcoming Budget will require the skills of a tightrope artist
Helen Demuth, a Partner in the Private Client Tax Services team in Smith & Williamson’s Bristol office, says that the upcoming Budget on March 19 will require the skills of a tightrope artist.
The Chancellor is under pressure to increase the income tax threshold beyond £10,000 and also to increase the threshold for 40% tax payers.
In reality, he has little scope to do either: giving just £100 each to 30m taxpayers costs an additional £3 billion.
However, announcements ahead of the next election to increase both thresholds are likely, although they may be timed to take effect at a later date.
Income tax, national insurance and VAT together brought in £354.6 billion for 2012/13, accounting for around 75% of total tax receipts.
Therefore even a small percentage change with these taxes can translate into billions of pounds more, or less, in the public coffers because of the volume of people paying them.
Raise threshold for employees’ NICs.
Lifting the low paid out of taxation
Separately, the Chancellor talks about lifting the low paid out of taxation, but he leaves them paying National Insurance – a tax in almost everything but name.
While the threshold for income tax will be £10,000 from 6 April 2014, employee NICs start at 12% on earnings above £7,956.
So someone earning £10,000 pa is clearly not lifted out of tax as they pay £245pa in NICs.
With talk of merging income tax and NI, these thresholds should be brought into line – or at least closer together.
Therefore, I would like to see the NI threshold nudged up, and ahead of inflation, towards the income tax threshold.
Importantly, such a move would be an excellent boost to the enterprise economy and, in my view, would be more attractive to business than deducting the first £2,000 from employers’ NI bills.
Expect more stealth taxes and tougher measures from HMRC
But how can the Chancellor raise money to pay for vote-sweeteners, such as increases in income tax thresholds, given that the upcoming election will be in just over a year?
In summary, we should expect more stealth taxes such as freezing of allowances and tougher measures from HMRC for non-compliance and late payment.
He may also, for example, be tempted to introduce a ‘mansion tax’ of some sort and reduce the pension tax-free lump sum.