Tory leadership contest: Do tax plans add up?

Money and a calculator Image copyright Getty Images

In the race to succeed Theresa May as prime minister, Conservative leadership contenders are setting out how they want to run the UK.

But what are some of the candidates saying about tax and spending, and do their sums add up?

Boris Johnson

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Image caption People would only start to pay the higher rate of income tax when they earn at least £80,000, under Boris Johnson’s plans

The plan: To raise the higher income tax rate from £50,000 to £80,000.

What it means: At the moment, individuals have to pay 40% income tax on any earnings above £50,000. So, a person earning £55,000 a year, pays 40% on £5,000.

Under Mr Johnson’s plan, the point at which the 40% higher rate kicks in would be raised to £80,000. This would not affect Scottish workers because the Scottish government sets its own income tax rates and bands.

Mr Johnson also wants to raise national insurance – to absorb some of the cost.

National insurance is a separate tax. It’s only paid for by workers and companies and it is meant to fund state benefits, such as the NHS.

Under this new tax regime, someone earning £60,000 a year could benefit by £1,000 a year; while someone on £80,000 or more would gain a maximum of £3,000 (because some of the benefits would be lost due to national insurance increases).

But it’s wealthy pensioners who stand to benefit the most, up to £6,000 each according to analysis from the Institute for Fiscal Studies (IFS). That’s because pensioners don’t pay national insurance to begin with.

So if someone already receives a generous work pension, not only will they be subject to less income tax (up to the new threshold), they also won’t be affected by the national insurance rise.

Changing the tax system in this way would cost around £10bn a year, according to Mr Johnson. He says the bill could be funded from the £26.6bn of “fiscal headroom”.

This “headroom” refers to government borrowing, which came in lower than originally expected and had been ear-marked by the chancellor for no-deal Brexit planning

However, if Mr Johnson chooses to fund his tax changes with this lower borrowing, it would not amount to a permanent solution. That’s because the money can only be spent once.

So, to pay for the policy in the long-term, Mr Johnson will need to raise taxes elsewhere, announce spending cuts or continue to fund it from government borrowing.

Dominic Raab

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Image caption Dominic Raab’s tax changes would be brought in over five years

The plan: To cut the basic rate of income tax from 20% to 15%.

What it means: Mr Raab says he wants to reduce the basic rate of income tax from 20p in every pound to 15p.

The basic rate of tax is paid on earnings between £12,501 and £50,000 a year.

Under Mr Raab’s plans, the basic rate of tax would fall by a penny a year – until it reaches 15p.

In addition, Mr Raab wants to raise the point that people start to pay national insurance, so that it’s the same as income tax (ie £12,501 a year).

The policy would mean a tax cut for the majority of UK workers. There are currently 26.3m basic rate taxpayers in the UK, according to HM Revenue and Customs.

However, the policy would be expensive. The IFS says it costs about £5bn for every 1p cut in the rate of income tax.

On top of that, Mr Raab’s pledge to align the starting rate of national insurance with income tax would cost about £10bn a year.

Like Boris Johnson, Mr Raab says this could be paid for by the government’s £26.6bn “fiscal headroom”. Therefore, he will also need to find other means of funding his tax cuts to keep them sustainable in the long term.

Michael Gove

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Image caption Michael Gove would replace VAT “with a lower, simpler, sales tax”

The plan: Scrap VAT and replace it with a sales tax.

What it means: VAT, or Value Added Tax, is the tax customers pay on most goods and services. The standard rate is currently 20%.

Under Mr Gove’s plans, VAT would be replaced “with a lower, simpler, sales tax”.

The difference between VAT and a sales tax is essentially administrative. With a sales tax, the 20% would only apply when an item is finally sold to a consumer.

With VAT, businesses still have to pay it when they sell goods to one another, and then claim the money back. In theory, under this new system, businesses would have less administration, which could help them become more productive.

The problem, however, is that businesses could be given an incentive to claim they were selling products to other businesses (rather than consumers) in order to evade the new sales tax.

The IFS says this fear over evasion has driven every country in the Organisation of Economic Co-operation and Development (OECD) – apart from the United States – to move away from a sales tax and towards VAT.

In the UK, VAT raises £140bn a year – so reforming such a big revenue-raiser could be risky if it doesn’t go smoothly.

Image copyright Reuters

Andrea Leadsom

Andrea Leadsom did not set out any detailed proposals for taxation, saying that the government’s lack of a majority in Parliament would rule it out.

“I do believe in low taxes and letting people keep more of their hard-earned income, but in a hung Parliament achieving fundamental tax reform is simply not possible,” she said at her campaign launch.

Image copyright EPA

Mark Harper

Mark Harper was openly critical of some of the other candidates’ pledges at his own campaign launch, saying they were “spending 60, 70, 80, 90 billion pounds of taxpayers’ money – it’s difficult to keep up with my colleagues in this leadership race about how quickly they’re spending money”.

He said that he did not think his colleagues should be promising cuts to higher rate taxpayers and that he would focus his efforts on the lower paid, although he also stressed that none of this would be possible in the next three years because the Conservatives do not have a majority in Parliament.

After that, he said he would like to increase work allowances for those on Universal Credit and cut the basic rate of income tax. Work allowances are the amount you are allowed to earn before your benefits are reduced – disabled workers or those with children may be eligible for them.

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Source: bbc.co.uk

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