UK Edition
The tax burden will remain at its highest level for 70 years if Rishi Sunak becomes Prime Minister despite his pledge to slash 4p off the basic rate of income tax, Britain’s top fiscal think tank has said.
Tax would still account for the largest proportion of national income since the early 1950s if the ex-Chancellor pulls off his promised tax cut in the next Parliament, the Institute for Fiscal Studies said.
“This is a very substantial tax cut,” said Stuart Adam, senior economist at the IFS. “But it is still considerably smaller than the net tax rise announced by Mr Sunak as Chancellor, which was comfortably more than twice as large.”
The shortfall is chiefly because of the rise in corporation tax from 19pc to 25pc on companies with profits above £50,000, planned for next April.
Mr Sunak pledged to introduce the income tax cut, which would be the biggest in three decades, as he tries to shore up support in the race to become Conservative leader.
The IFS said it would reduce the tax take by £19bn a year once fully implemented. However, the total impact of his previously announced raids including national insurance and corporation tax rises is expected to raise £46bn.
Mr Sunak aims to reduce the main rate of income tax – which currently applies to earnings between £12,570 and £50,270 – from 20p to 16p by the end of the decade if he becomes Prime Minister.
While Chancellor he already pledged to decrease the rate to 19pc by 2024. Sources on his campaign have told the Telegraph Mr Sunak hopes to cut the rate by a further percentage point over each of the three years after that, taking it to 16pc by 2027.
The adjustment would mean someone earning £32,000, the UK’s current average wage, takes home £777 more in 2027 than they do at current rates. This would increase to £945 if wages rise in line with forecasts by the Office for Budget Responsibility, Britain’s fiscal forecaster.
The benefits are muddied by Mr Sunak’s controversial decision to increase the rate of National Insurance contributions by 1.25p in the pound, which came into effect this year, to fund health and social care spending.
The government’s new thresholds and upper limits for National Insurance contributions and income tax are aligned, meaning both now impact the same band of earnings.
Mr Sunak's National Insurance raid has substantially reduced the overall net boost to take-home pay from his combined changes.
Once the National Insurance adjustment and income tax cuts are both priced in, someone earning £32,000 in 2027/28 can expect to pay just £84 less to the Exchequer than before Mr Sunak took change of the Treasury, according to figures compiled for the Telegraph by the IFS.
Someone earning £50,000 would pay £579 less, but those earning £80,000 will pay £820 more. National Insurance contributions must also be paid by employers, increasing business costs.
The TaxPayers' Alliance claimed an immediate 4p income tax cut could boost growth by £11bn, with another £27bn to come from reversing the National Insurance increase.
Foreign secretary Liz Truss, Mr Sunak’s rival for the leadership, has pledged to scrap the increase in corporation tax and reverse the National Insurance rise.
Mr Stuart said: “Ms Truss’ proposed package of tax cuts is considerably larger than Mr Sunak’s and, accordingly, would be more likely to breach the current set of fiscal targets.”
He said “the biggest difference between the two candidates’ tax plans is one of scale and timing, not direction of travel”, warning neither Ms Truss nor Mr Sunak was coming clean about how they would eventually pay for the tax giveaways.
“Both candidates are now proposing substantial tax cuts relative to current government plans without reference to any of the spending cuts which would, in the end, have to accompany them,” he said.