The coming tax reshuffle: winners and losers

Last week, the Prime Minister carried out a major Cabinet reshuffle, aiming for a political reset as the election run-in builds up steam. This week, the Chancellor is doing his bit towards the same goal, with a major tax reshuffle – adding tax cuts to the tax rises already in train – on the cards for the Autumn Statement.

We know this because almost every single tax has been floated as under consideration for a cut in recent days. An orderly run-in to a fiscal event this has not been, as hints have been dropped via newspaper front pages, Ministerial broadcast rounds and even a Prime Ministerial press conference. Hugh Dalton will be turning in his grave.

But while this may be bad fiscal etiquette, the real time sharing of normally private internal government debates on tax decisions has one big advantage: we can analyse what they do – and don’t – mean for the punters and the public finances now, rather than wait until Wednesday afternoon.

The most likely, albeit still uncertain, tax cut to come is reducing the basic rate of Income Tax. You shouldn’t have needed leaks to know this was the frontrunner given it’s always been Rishi Sunak’s revealed preference. But what would the effect be? Here are five quick facts to remember should a 1p basic rate cut get announced on Wednesday.

1. A tax cut for 36 million people… Who doesn’t like a tax cut? The 36 million people (including 8 million pensioners) who would benefit are likely to be broadly pro, with an average gain of around £200 if the basic rate is cut by 1p. A snip at just £7 billion per year. (Note the overall conclusions of this briefing would be similar for a National Insurance rate cut, albeit it would be slightly cheaper and less welcome for pensioners.)

2. …and the richest half of the population in particular. The cash gains from cutting the basic rate aren’t spread evenly. You would need an income of at least £50,270 to receive the maximum benefit of £380. On a household level, the results are further skewed towards the top because some poorer households don’t gain at all while others contain two taxpayers, and poorer workers on Universal Credit lose 55 per cent of any tax cut via means-testing. Overall, 80 per cent of the gains go to the richest half of the population, and half to the top quarter.

3. We’re reshuffling taxes not cutting them – with most people seeing taxes go up. Why? Because big, previously announced tax rises are underway.  If we think about the impacts of these changes next April in particular, the Income Tax and National Insurance thresholds being frozen (rather than increasing by 6.7 per cent in line with inflation) will raise £8 billion, and cost all basic rate employees £270 (and pensioners £170). In fact, you’d only be a winner in April if you happen to earn between £40,000 and £51,000 from these offsetting tax changes. Someone on the median salary (£27,000) would be around £120 worse off, and the biggest loss – in both cash and proportional terms – would be for someone earning around £13,500.

4. Freezing thresholds while cutting rates transfers the tax burden from high to middle-income Britain. Sticking to plans to freeze personal tax thresholds is in practice funding any basic rate cut. This effectively shifts the tax take from high earners (who gain most from rate cuts) to low and middle earners (who gain little). Or put it another way – cutting the basic rate while going ahead with freezing the income tax personal allowance is a tax cut for the top fifth of households, being paid for directly by the bottom four fifths, as the next chart shows. It’s levelling down, not up, in tax policy land.

5. Bottom line – overall income taxes are rising. The £7 billion giveaway from a 1p basic rate cut comes in the context of a wider £40 billion set of tax rises via the six-year freeze in personal and employer tax thresholds. And that’s before we get to wider tax rises this parliament. Whatever happens this Wednesday, the big picture is that Britain in the 2020s is a higher tax country than we are used to being.

People prefer tax cuts to tax rises, and politicians infinitely prefer talking about the former than the later. But the punters aren’t stupid – they know when taxes overall are up not down. The last PM to cut the basic rate of Income Tax expected plaudits. But Gordon Brown’s funding of the 2p cut from 22 to 20p in 2007 in the end was remembered for sparking a massive row about the removal of the 10p rate of tax to fund it. Robbing Peter big, not to pay Paul, but to give Peter himself a little back is not a recipe for a grateful Peter. Or indeed a grateful nation.