Tories Give Ground On UK Tax

by Robert Lee, Tax-News.com, London

13 May 2010

The Conservatives appear to have given significant ground in the area of taxation in order to secure a coalition agreement with the Liberal Democrats.

While the precise terms of the coalition agreement have yet to be made public, it is being widely reported that the Conservatives have agreed to raise the threshold at which income tax becomes payable to GBP10,000 of annual income, a measure which would save taxpayers about GBP700 per year and take millions of low income workers out of the income tax net altogether. To help pay for the proposal, the Conservatives have been forced to drop their pledge to raise the inheritance tax threshold to GBP1m, but the Lib Dems have scrapped their planned 'mansion tax' on properties worth GBP2m or more in return.

It appears that the Conservative manifesto pledge to partially roll back the 1% increase in employee National Insurance contributions (NICs) next year has also fallen by the wayside, although the planned 1% increase in employer NICs will be reversed, a measure welcomed by business. Companies and investors will be disappointed to learn, however, that both parties seem to have agreed to an increase in the capital gains tax (CGT) rate, currently 18%. Some reports have suggested that CGT could rise to as much as 40%, but with generous exemptions for business earnings. 

The future of Conservative plans to offer married couples a tax break worth GBP550m per year look uncertain. As part of the coalition agreement, the Liberal Democrats have agreed only to not vote against the measure when it comes before parliament.

Some form of tax on the banking sector, in addition to reforms to banking regulation, an area where there is common ground between the two parties, looks a certainty for the forthcoming legislative programme.

However, the most pressing issue for the country is tackling the GBP165bn budget deficit. For the time being, the Liberal Democrats have received an assurance that front line public services will be spared the expenditure axe, although they have agreed to Tory plans for GBP6bn in spending cuts this year. However, the fact that the GBP10,000 tax threshold will cost about GBP17bn in revenues means that it will probably have to be phased in, depending on fiscal conditions going forward.

The newly-appointed Chancellor of the Exchequer, George Osborne, will announce an emergency budget within the next 50 days, and this is expected to take place late next month or early in July.

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