In the second part of his look ahead to next week’s budget, the IoD’s head of taxation, Stephen Herring, says the chancellor should consider bold personal tax reforms
Although IoD members strongly support George Osborne’s deficit reduction plan, they expect the chancellor to set targets in the budget for government savings that allow overdue cuts in the tax burden during this parliament.
They also favour broad-based tax simplification and the removal of tax laws and rates that damage incentives for work and investment.
While the scope for reform and simplification was limited by the necessary compromises of the coalition, no such barriers now exist and IoD members would welcome – and expect – a bolder, more radical agenda.
Personal tax: IoD proposals for 2016 budget
The removal of the 60 per cent+ spikes in income tax rates at £50,000 and £100,000 – from where the value of child benefit and the personal allowance are withdrawn – ought to be a higher budget priority than scrapping the 45 per cent additional income tax rate. These rules both complicate the UK tax system and introduce economic distortions and disincentives.
IoD members agree with the public generally in their dislike of inheritance tax. Inheritance tax is: unpredictable in its incidence; regressive in its impact from some perspectives – favouring the extremely wealthy over the affluent; necessitates complex reliefs; and represents a further tax upon often already taxed income and capital. Its replacement by the introduction of death as an occasion of charge for capital gains tax upon any gain arising between acquisition cost and probate value – preserving the other existing exemptions – is overdue and fiscally affordable.
The chancellor should implement the government’s vision for a £12,500 personal income tax allowance and £50,000 higher rate income tax threshold by triple locking both of these on the same basis as the single-tier pension triple lock. If a state benefit is capable of being triple locked, so should tax allowances, rate bands and thresholds.
Personal tax: IoD proposals for 2017–2020
The 45 per cent additional rate of income tax – together with the two per cent rate of national insurance contributions – results in almost half of an executive’s income being paid in tax above £150,000 per annum. This is a significant disincentive and, understandably, reduces the remuneration and dividends paid by companies to their director shareholders. It was introduced in the aftermath of the credit quake –albeit at a higher 50 per cent rate – and should be removed.
Most IoD members are paid under PAYE although a small percentage are either self-employed or operate through personal service companies. The incidence of taxation – especially national insurance – varies significantly. We consider that the same level of income should, broadly, bear the same level of tax regardless of business structure. This is becoming increasingly important as flexible working arrangements apply to a rising percentage of the working population.
There is a time for radical and bold personal tax reforms and simplification – and that time is now!
Stephen Herring is head of taxation at the IoD