The theme of the Chancellor’s Budget on Wednesday was breathing space. The additional support to households and businesses – as energy prices rise – will doubtless be welcome.
But for those of us hoping for a strategy to bring about a better-designed – and simpler – tax system, the Budget disappointed.
Worse, some of its measures pull in different directions.
Tax and tax rises clash
It was a Budget of many measures: including 31 tax cuts and 21 tax rises.
This year the cuts dominate. There were £2.4bn of giveaways against £0.7bn of tax rises.
After that, things change. The cuts stay at around £2bn a year, while the tax rises grow to £9bn by 2031–32.
However, the biggest tax rise of all was not in the Budget. Major personal tax thresholds – the amount you can earn before you pay the basic or higher rate of tax – have been held at their 2021 levels by former chancellors Rishi Sunak, Jeremy Hunt and Rachel Reeves in turn, and are set to stay frozen until April 2031.
Combined, the freezes are estimated to raise £44bn this year, rising to £75bn by 2030–31.
At the same time as the Government has frozen tax threshold to raise money, several temporary tax cuts are also being held in place, extending their cost.
The “temporary” 5p cut in fuel duties, introduced for an initial twelve months by Sunak in 2022, has been extended again, now to July 2027.
VAT on household electricity stays at zero until then, and most households in England get a £100 payment through council tax this winter to help with rising energy bills.
But time-limited giveaways have a habit of being extended. Having all three in 2029/30 would cost around £8bn: more than half the £15bn margin the Chancellor has left himself against his own financial rules.
Pensioners given a tax cut – to offset a tax rise
There’s more for some pensioners. From next April, those with incomes no higher than the full new state pension – £13,036 a year – should pay no income tax, thanks to a new pension tax allowance, which will be tapered away for pensioners with slightly higher incomes.
The gap between the triple-locked new state pension and the income tax personal allowance rises faster than earnings over time, so the new allowance will help more pensioners at a rising cost: from £45m in 2027/28, its first year, to £150m by 2029–30.
Then it officially ends. So the Government is creating a new tax break to offset its own tax rise, for one group, for three years.
But I can’t see whoever is chancellor in 2029 relishing the opportunity to bring hundreds of thousands of low-income pensioners into income tax? Will it just end up being extended again?
A ‘temporary’ tax rise on banks – but will it get extended?
There is also a supposedly temporary tax rise – on banks. The surcharge on bank profits will double from 3 to 6 per cent, for 15 months from January.
The Treasury links this explicitly to the energy support and promises it “will not be extended”.
Perhaps not. But the right tax rate on bank profits does not depend on the government’s desire to fund energy support – and does anyone think that bank profits should be more heavily taxed than at present, but only over the period from January 2027 to March 2028?
“Temporary” tax cuts have a tendency to get extended; we will see what happens to this “temporary” tax rise.
Tax changes on savings are confusing
Confusion also runs through the taxation of savings. Does the Chancellor think that tax on savings income should be lower or higher?
He has sensibly abandoned the plan to cut the cash ISA limit from £20,000 to £12,000 for under-65s. But simultaneously he has pushed up income tax rates on savings income by a further two percentage points (to 24, 44 and 49 per cent).
That increase in income tax rates also applies to property income. From next April a higher-rate landlord will pay 44 per cent on rent, and more on their true profit because mortgage interest gets relief only at the basic rate.
A consequence of this is higher rents. The oddity is that if you buy a rental property through a company, profits left in it can pay as little as 19 per cent, with the interest fully deductible. Hold shares in a housebuilder or an estate agent through an ISA and there is no personal tax at all.
There is a case for reforming how asset income is taxed. But not in a piecemeal way.
Tax system in desperate need of a vision
The big picture is of a tax system in desperate need of an overarching vision and careful design – all the more so as the tax take heads for a record.
Without one, each Budget risks adding more inconsistencies, as this one did.
Perhaps a vision will come in the Prime Minister’s 10 Year Plan, or at the “tax update” on simplification promised for next year.
That is the test: set out what a good tax system looks like and then implement reforms that move us closer to it. I wait with bated breath.
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