THE TAX-FREE allowance could be raised faster than previously planned in Wednesday’s budget, City A.M. understands, as part of a major deal to reduce taxes on workers at both ends of the income distribution.
Chancellor George Osborne yesterday promised that “the bulk” of new measures announced will benefit people on low and middle incomes, as economists warned this is his last chance to boost economic growth before the next election.
Analysts at the Centre for Economics and Business Research (CEBR) called on Osborne to relax planning rules to stimulate economic growth without increasing government spending.
The CEBR suggested scrapping the 50p top rate of income tax, which it believes will lose tax revenues by driving high-earners away, and cut fuel duty to boost growth.
These extra supports are needed because official GDP projections – calculated by the Office for Budget Responsibility (OBR) – are too optimistic, the think-tank believes.
The government was already expected to raise the threshold at which income tax kicks in by £630 in this budget as part of a long-term plan to take all those on incomes below £10,000 out of the tax.
However, Osborne (right) is believed to be bowing to Liberal Democrat pressure to raise the allowance more quickly, benefiting those on low incomes.
In exchange the Liberal Democrats are expected to drop their opposition to the chancellor scrapping to 50p rate on those earning over £150,000.
Business secretary Vince Cable last week said the party is “not ideologically wedded” to the top rate of income tax, as long as the poor also benefit and the tax is replaced with another levy on the rich.
However, increasing the allowance is expensive – PwC estimates that every £100 rise in the tax-free allowance costs the Treasury £500m in lost income, which must be found elsewhere.
Furthermore, the lowest paid may not receive the full benefit of the change, critics have claimed.
Taxpayers with children, for example, will find their tax credits reduced as they pay less income tax, leaving them barely affected by the size of the allowance.
EXPECTATIONS FOR WEDNESDAY’S BUDGET
● 50P TOP RATE
“It is widely accepted that it actually brings in little revenue and maybe acts as a deterrent in attracting – or keeping – top talent,” commented economist Howard Archer of IHS Global Insight, yesterday. Yet Archer notes that a reduction in the top rate of income tax would nonetheless be “politically contentious”. Rumours have strengthened in recent days that Osborne will cite evidence from the HMRC as justification for cutting the rate to 45p or 40p.
● TAX FREE ALLOWANCE
Liberal Democrats are intent on raising the tax free allowance to help workers on low or average incomes. With the policy facing little Tory resistance, we suspect that an acceleration in bringing the tax-free allowance to £10,000 could be included.
● PENSIONS RELIEF
Labour is pushing for a cut in the £50,000 annual allowance on pensions contributions. Osborne is likely to succumb to the demands.
● STAMP DUTY
One other area where the chancellor is expected to clamp down on the wealthy is by closing a loophole on stamp duty, which some people avoid by putting expensive properties in off-shore firms . BDO’s Stephen Herring said the change is “as close to a dead cert as you can get”.
● ANTI-AVOIDANCE (GAAR)
Proposals to crack down on tax avoidance are very likely to be included in the Budget, with draft proposals having been on the table since the beginning of the year.
● TYCOON TAX
Another wealth-bashing measure touted by deputy prime minister Nick Clegg last weekend. The Lib Dems admitted that the tax “would have to be looked at by the Treasury” after tax accountants slammed it as unnecessary and unworkable.
● MANSION TAX
The Lib Dems have also been making noises about a possible mansion tax. “A form of mansion tax could be introduced simply by inserting new higher level bands of council tax,” Ernst & Young said yesterday. It remains unclear what will happen.
● VALUE ADDED TAX
E&Y’s Patrick Stevens added that VAT “remains relatively low compared to other countries across Europe – so there is room for manoeuvre.” Yet any rise would be very unpopular, and extremely unlikely.
● FINANCIAL ACTIVITIES TAX?
Could banks be hit yet again? Maybe via another hike in the already elevated charge on bank balance sheets? While opposed to a Tobin tax, the UK government has not ruled out a higher FAT tax.
● CONTROLLED FOREIGN COMPANIES
The chancellor will finally conclude plans to reform CFC rules which currently tax overseas subsidiaries of UK-based firms – a measure accused of deterring companies from locating their HQs in Britain.
● CORPORATION TAX
The Treasury is already cutting corporation tax according to a plan spanning several years. As a growth-boosting measure, Osborne could announce an acceleration of the plan or a timetable to cut the rate further to just 20 per cent over time.
● ONLINE GAMBLING GAMES
“We could see the decision on the introduction of taxation on Remote Gaming, targeting online poker and betting,” warned Ernst & Young yesterday.
● CIGARETTES AND ALCOHOL
Additional taxes on recreation are, as usual, expected to include tobacco and booze.