The Conservative Party have voted to elect Liz Truss as their new leader and the UK’s fourth Prime Minister since the country voted for Brexit in 2016.
Liz Truss and her team will not have long to celebrate, as they will be walking into Downing Street under the backdrop of the most severe economic conditions in a generation, and immediate and extreme actions will be needed to offer the much-needed support for working families and businesses.
Since Boris Johnson resigned as Prime Minister on 7 July, the economic state has changed dramatically, with the energy price cap now confirmed to increase by 80%, pushing families and businesses to the limit when it takes effect in October.
The original eleven Conservative Party leadership candidates all led with promises around tax, with Liz Truss offering some of the most dramatic tax cutting policies at a cost of almost £40 billion. So, what has Liz Truss promised and what will she actually be able to do?
National Insurance/Health and Social Care Levy
Liz Truss wants to reverse April’s 1.25% National Insurance increase, offering a universal tax cut for workers. Someone earning £50,000 would be £468 per annum better-off if the National Insurance increase is now cancelled. Higher earners will benefit more, with someone earning £180,000 enjoying a tax cut worth over £2,000 per annum.
The eventual measures may need to be scaled back and the National Insurance reversal may be limited to basic rate taxpayers (anyone earning less than £50,271).
There’s no explicit confirmation from the Truss team that employers will benefit from any reversal, with employer’s National Insurance now standing at 15.05%, which would spell bad news for businesses facing difficult trading months ahead. It’s also inconceivable that the 1.25% increase to dividend tax rates will also reversed, if the measures are to be targeted at lower and middle earners.
Liz Truss said she wants to cut taxes “from day one” but reversing the 1.25% National Insurance increase part way through the tax year is administratively complex – it would also mean three different National Insurance regimes applying this tax year and inevitable problems with PAYE codes and the yoyo effect to people’s monthly net pay. Will HMRC’s systems be able to cope with that complexity and will employers be able to apply the right tax deductions?
Household tax break/increasing the marriage allowance
Liz Truss offered a novel proposal to increase the marriage allowance to the level of the personal allowance – a tax break worth over £2,500 to a basic rate household. Truss’ ‘household tax break’ has received very little attention but it offers the most generous tax giveaways of any of her proposals, targeted at lower earning couples.
Given the limited attention, it’s possible that the household tax break may not be taken forward; even if it is, it’s expected that any increase will be phased in over several years, so the full benefit will not be seen for some time.
Truss was originally silent on Income Tax, presumably relying on Rishi Sunak’s last act as Chancellor to cut the basic rate of Income Tax to 19% in April 2024, worth £377 per annum. But more recently, Liz Truss has suggested increasing the point at which someone pays higher rate tax. Sunak’s stealth move to freeze all the personal tax allowances at the 2021 Budget has had an even more severe effect with rising inflation, and there could be an interesting opportunity for Liz Truss to raise the threshold to support middle earners. Any changes to allowances and thresholds are likely to take effect from 6 April 2023.
It’s noteworthy that Boris Johnson pledged to raise the basic rate threshold to £80,000 in the 2019 Conservative Party leadership contest, which led to him becoming Prime Minister – a promise which never materialised and a policy which Liz Truss could steal a march on now.
Green Levies/Fuel Duty/VAT
Truss promised to cut fuel duty by more than the 5p per litre reduction already in place and introduce a temporary suspension of the Green Energy Levy, which would cut £153 from energy bills. However, since making these early comments, petrol prices at the pump have started to reduce but energy prices have skyrocketed.
In response, Liz Truss may not now go ahead with the fuel duty cut but is said to be considering the ‘nuclear’ option to reduce VAT by as much as 5%. Economists critical of Truss’ tax cutting strategy have argued that a VAT cut would only add to long-term inflation and would benefit wealthier households to a greater extent, but Truss’ team will point to the success of Alistair Darling’s decision to do the same in 2008 in response to the global financial crisis.
Suspending the Green Energy Levy and cutting VAT would have to be temporary; but even then, the combined measures would present an eyewatering cost to the Treasury.
Truss pledged early in her campaign to “keep Corporation Tax competitive so we can attract business and investment into Britain” – but she hasn’t completely committed to cancelling the scheduled increase to Corporation Tax to 25% from April 2023. She has also proposed an overhaul of business rates but has not offered any specific details.
With businesses becoming increasingly nervous about the economy and likely recession, the Corporation Tax increase is unlikely to go ahead, which was expected to yield £16 billion per annum for the Treasury.
In one of the many leadership debates, Truss offered that she would review Inheritance Tax if she became Prime Minister. Conservative Party members and traditional Conservative voters have a deep disdain for Inheritance Tax, and Liz Truss may be tempted to abolish the tax completely; but there would need to be something in its place, and there could be revived calls to introduce a wealth tax. Reforms to capital taxes would require a detailed consultation, and Truss may not have enough time to do anything so dramatic with the next election scheduled for Spring 2024.
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