The author, who advises HNW clients on tax and wealth planning, considers the likely direction of tax and related policy under the UK's new prime minister.

The following commentary comes from Mark Davies, managing director of Mark Davies & Associates, and is prompted by the recent election of Boris Johnson to leadership of the Conservative Party, and hence taking on the mantle of UK prime minister. The editors of this news service are pleased to share these views; they do not necessarily agree with all opinions of guest writers and invite readers to respond. Email tom.burroughes@wealthbriefing.com and Jackie.bennion@clearviewpublishing.com

It has been reported that Boris Johnson’s government will hold an emergency budget this October. What it entails will depend on whether we expect a hard or soft Brexit, or indeed no Brexit at all.

In consequence, details of Boris’ tax proposals are sketchy, but on the Prime Ministerial campaign trail he promised: “We should be raising thresholds of income tax - so that we help the huge numbers that have been captured in the higher rate by fiscal drag.” In addition, he promised to increase the threshold at which taxpayers start paying National Insurance contributions. He said: "I think we should be looking at lifting people on low incomes out of tax, lifting the thresholds for National Insurance and I would remind you that that’s where my priority is."

The 40 per cent higher rate threshold was introduced in the 1988 budget by the Chancellor of the day, Nigel Lawson. He declared: “The way to a strong economy is to boost incentives and enterprise. And that means, among other things, keeping income tax as low as possible.” He declared the abolition of the 45 per cent, 50 per cent, 55 per cent and 60 per cent higher rates of income tax. 

At that time, the higher rate threshold would have applied to relatively few people that today we would perceive as being very wealthy. However, over time, wage inflation has not kept pace with the higher rate threshold and today, police inspectors and head teachers’ pay tax at the higher rate. I do not think that many people would describe them as “high earners”.

Following Lawson’s lead, Johnson announced that he intends to raise the higher rate threshold for taxpayers in England, Wales and Northern Ireland from £50,000 ($48,575) to £80,000. Currently, taxpayers are liable to pay income tax at 40 per cent on income in excess of £50,000 but under his proposals, they would only pay tax at the higher rate on income above £80,000. This would result in a saving of up to £6,000 per annum. 

Additionally, increasing the point at which people start to pay National Insurance contributions would benefit low earners greatly, and low income households could be more effective at stimulating the economy as such households are more likely to spend the tax saved. 

Although only about 8 per cent of taxpayers would see an immediate benefit from the proposals to change the higher rate threshold, according to the Institute for Fiscal Studies, around 25 per cent of individuals will become higher rate taxpayers, or will live in a household with a higher rate taxpayer at some point in their lives and could potentially benefit in the future.

Moreover, raising the higher rate threshold would take around 2.5 million people out of higher rate tax, which would reduce the number of higher rate taxpayers down to its lowest level since 1990. 

Johnson’s detractors claim that increasing the higher rate threshold is nothing less than a gift to middle England, but there is some economic theory to support the contention that tax cuts can pay for themselves, illustrated by the “Laffer Curve”. 

In the 1980s the economist Arthur Laffer, a member of Ronald Reagan’s Economic Policy Advisory Board (and an advisor to Donald Trump’s 2016 presidential campaign), proposed that as income tax rates increase, a government can expect to see an increase in their tax revenues up to a certain point. However, further increases in tax will lead to diminishing returns. This is because people avoid tax, have less incentive to work or take entrepreneurial risks or accept a promotion if their total take home pay decreases. Internationally mobile taxpayers also have the flexibility to relocate to a country with lower tax rates.

Laffer proposed that allowing people access to more of their earnings encourages a positive change in their behaviour. It stimulates economic growth, thereby creating more tax revenue for the government. However, it can come at a cost, as both Reagan’s and Trump’s policies can lead to an escalation of government debt if not carefully managed. 

Some critics claim that Laffer’s theory is too simplistic, but there is some evidence of it in practice. In the 2009 budget, the Labour government announced the re-introduction of the 50 per cent income tax rate on income above £150,000 in an attempt to tax the nation back into prosperity. In 2010/11 when the top rate of tax was still 50 per cent, the total of HMRC income tax receipts collected was £453.6 billion while in the following fiscal year, when the rate was dropped to 45 per cent, tax revenue increased to £472.3 billion and has been on an upwards trend ever since, with the 2017/18 fiscal year seeing £594.3 billion.

I agree with the contention that the higher rates of tax should be reserved for those most able to pay. Johnson’s proposal to increase the higher threshold is long overdue, and is a welcome first step, but it does not go far enough. Our income tax and National Insurance Contributions (a tax in all but name), need to be considered together and radically overhauled.  It is a great injustice if young people working today pay income tax and NIC while those retired, from the comfort of their homes that the young can ill afford, pay no NIC at all.  Income should be taxed in the same way, whether you are employed or self-employed; or young or old.