Conservative Conference 2022 (part 2): Review puts spotlight on high marginal rates and taxing families

11 Oct 2022

Part two (of four) of our annual assessment of Conservative tax and related policy following the party's conference. This part focuses on personal and employment taxes, including inheritance tax and property taxes, reaction to the income tax and national insurance changes, and speculation about the ongoing review of the tax system.

This report includes:

Employment taxes – NI and income tax changes go down well
Review of tax system puts spotlight on high marginal rates and taxing families
Inheritance tax – polarising levy under review
All quiet (mostly) on the property tax front

The other parts of our post-conference assessment of Conservative tax and related policy can be read at:
Conservative Conference 2022 (part 1): New Government goes for growth
Conservative Conference 2022 (part 3): Government seeks to woo business with low tax and deregulation
Conservative Conference 2022 (part 4): Can Government convince OBR it can meet its targets?

Above: Panelists at a TaxPayers' Alliance / Institute for Economic Affairs debate on the conference fringe which features in this report, including Chief Secretary to the Treasury Chris Philp and economist Gerard Lyons

Employment taxes – NI and income tax changes go down well

Cuts to national insurance and the income tax basic rate are popular, though there are concerns about their affordability. The Government would probably like to go further, especially on thresholds, but can it afford to?

Coming into the conference, the Chancellor confirmed in his mini-Budget that he will spike the 1.25 per cent rise in national insurance (NI) from 6 November and axe the planned levy to fund health and social care (which was due to come in in April 2023). The funding for health and social care will now come from general taxation (or, more realistically, borrowing). This change was well trailed and received a cross-party welcome. It sailed through the House of Commons on its first post-conference sitting day, Tuesday 11 October.

More surprisingly the mini-Budget also brought forward, from April 2024 to April 2023, a promised one per cent cut in the basic rate of income tax, as well as announcing the abolition – subsequently reversed – of the 45p additional rate (see here). Additionally the 1.25 per cent increase in the dividend tax rate which accompanied the NI increase earlier this year has been reversed. These (including the NI change though not now the 45p rate) are collectively expected to cost the Government £21 billion in 2023-24.

These changes are popular inside the Conservative Party as they are with voters more widely (see polling mentioned above). The promise of the NI reversal was a significant part of why Liz Truss won the leadership contest in the summer. To the extent that they faced criticism at the conference it was over the manner of their introduction. For example, the economist Gerard Lyons (who has been described in some media reports as ‘Liz Truss’s favourite economist’), told a fringe meeting that, in his view the emergency fiscal statement should have stuck to three things – the energy price guarantee, and the NI and corporation tax reversals. Markets were fully on board with that, he thought. Adding on additional measures like the two income tax changes, alongside the absence of OBR forecasts, is what had spooked them, he suggested.

In his conference speech, the Chancellor explained the rationale behind the cuts: “we as Conservatives… believe, it is an important principle that people should keep more of the money they earn. We were faced with a 70-year high tax burden… we were confronted with low growth… and the path we were on was clearly unsustainable. So that is why we are cutting taxes for working people.”

Trumpeting claims of Conservative success since 2010 the Chancellor drew attention to the more than doubling of the tax-free personal allowance, but there was no hint here that he plans to unfreeze the personal allowance, or the higher rate threshold, both of which are set to remain the same in cash terms until 2026. At the time his policy was set (the March 2021 Budget) inflation was below two per cent. Notwithstanding the pressures on the public finances, with inflation now running at 10 per cent, pressure will surely grow on the Government to end the freeze earlier than planned. There were pre-mini-Budget rumours that this was under consideration, including a ‘senior ally’ of Liz Truss quoted in the media saying she is "certain" to end the freeze.

IFS analysis published just after the conference showed that these ‘stealth freezes’ in tax and benefit thresholds will take twice as much money from UK households as they stand to gain from the Government’s cuts to headline rates. The IFS analysis showed that even after the mini-Budget NI and income tax cuts, people in every part of the income distribution are set to lose more than they gain. The figures were covered prominently in the Conservative media (the Telegraph led its front page with the headline ‘Income taxes to rise by £21 billion despite budget’), which will add to the pressure on the Government in this area.

Beyond headline rates the Government’s plans to repeal 2017 and 2021 off-payroll working (IR35) reforms were much raised – and much praised – in Birmingham. Ministers are proud of the policy change, which they see as both a simplification and a pro-growth step. Speaking on the fringe, the Chancellor described IR35 as a regulation that burdens the self-employed and small businesses and one he was frequently lobbied about both as a backbench MP and as a minister. He said the Government’s reforms are the result of listening to these concerns. Business Secretary Jacob Rees-Mogg, at a separate fringe meeting, blamed the failure of the recent reforms on HMRC thinking of everything through tax and not economic growth. At a further fringe event Chief Secretary Chris Philp said: “When it comes to freelancers – people who are operating innovatively, flexibly and dynamically in our economy, we are going to reverse the burdens imposed by the 2017 and 2021 IR35 moves.”

The 2017 and 2021 reforms were of course justified as anti-avoidance, pro-compliance measures. The Growth Plan suggests repealing them will free up time and money for businesses that engage contractors, that could be put towards other priorities, as well as minimising the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules. However the figures in the plan show that it is estimated it will cost the Exchequer an amount rising to more than £2 billion a year by 2026-27. Former HMRC permanent secretary Edward Troup, in a scathing FT article, accused the Chancellor of mistaking partisan lobbying for legitimate business concern, and suggested that this was “not merely a nod and a wink to avoiders and evaders: it’s a “welcome here” sign.”

Meanwhile the Business Secretary – famously unenthusiastic about working from home – may have set hares running with his comments at a Daily Telegraph-hosted fringe meeting. Rees-Mogg said he was interested in the idea of making commuting costs tax deductible to even the playing field with home working. “If we want economic growth and productivity growth we need people to get back to their offices,” he said. “It’s worth bearing in mind that people do get a tax deduction for working from home. There’s a carrot currently for working from home, is that a good idea?”

However, elsewhere on the fringe, at an event on family policy, DWP minister Victoria Prentis called for more flexibility from employers on hybrid working, and also on working patterns that reflect what childcare their workers can afford.

Review of tax system puts spotlight on high marginal rates and taxing families

The Government is undertaking a ‘wholesale review of the tax system’. It appears high marginal rates of tax for some higher earners are a central focus, though the 45p rate may give the Government pause for thought before announcing anything else that might be labelled a ‘tax cut for the rich’. A bigger transferable tax allowance may also be under consideration.

The Growth Plan states that: “the government will conduct a review to identify where it can go further to make the tax system simpler, better for families and more pro-growth. The Chancellor will report on this next year.”

What will the review be looking at? Liz Truss promised reviews of various areas of the tax system during her leadership campaign, including taxation of families, business rates, inheritance tax and taxation of the self-employed. One area which has a fair amount of interest among both MPs and free market thinkers is ironing out the high marginal rates which exist within the tax system, such as around the High Income Child Benefit Charge (HICBC) and withdrawal of the income tax personal allowance.

A week before the conference (and two days after the mini-Budget) the Sunday Telegraph ran a story indicating that this area is indeed being looked at as part of the review. “Treasury officials are drawing up a list of ‘pinch points’ that discourage people from earning more money by imposing high rates of tax on extra earnings, as part of a wholesale review of the tax system,” it stated. These include: a review of the lifetime and annual allowances on pension pots which could benefit up to 1.6 million savers; giving workers who earn more than £100,000 a full income tax personal allowance; and abolishing the HICBC, apparently over concerns it discourages households from earning more. The changes are likely to come as part of a full Budget next year, the paper says.

At the conference ministers were generally wary of speculating on future tax cuts, but backbenchers and others were happy to weigh in. Richard Holden, a County Durham Conservative MP who has sat on the Finance Bill and Public Accounts committees, told a Taxpayers’ Alliance fringe event that the Conservatives need to do more to make work pay. The Government has addressed this with changes to Universal Credit to help those at the lower end of the income scale, he suggested, but ‘pinch points’ such as the HICBC and the lifetime pensions allowance need addressing. He mentioned in particular the harmful impact the latter has on doctors. Holden also responded sympathetically to a questioner who suggested that the Government should remove the personal allowance taper. A junior minister at the Department for Levelling Up, Dehenna Davison, speaking at the same event, gave a more cautious general response that the Government should be looking to cut taxes to spur growth.

Influential economist Gerard Lyons (see above) suggested at a fringe meeting that the Government should have packaged the scrapping of the 45p rate alongside abolition of the HICBC, withdrawal of the personal allowance and ‘pulling people out of fiscal drag’ (ie unfreezing thresholds), presenting it as a ‘tax simplification plan’. Chairing the event, IEA chief Mark Littlewood noted that there were what he called ‘colossal pinchpoints’ in marginal rates of benefit withdrawal as well as with tax paid by high earners. An audience member drew attention to the impact on marginal rates of student loan payback.

This issue also came up at the CIOT’s conference event, held jointly with the Institute for Fiscal Studies (IFS). All three panelists at the event agreed that the withdrawal of the personal allowance for those earning more than £100,000 per year had added complexity and opacity to the tax system. Stuart Adam (IFS) also pointed to the HICBC and the tapering of the pension allowance as exacerbating the complexity further.

Reforms at the high and low ends of the income scale were packaged together in a 2018 report by Tom Clougherty at the Centre for Policy Studies (CPS), another influential think tank. Some measures in that report have been introduced (eg raising the NI threshold), some have been partly introduced (eg cutting the universal credit taper rate), others have not so far been introduced (eg abolishing withdrawal of the personal allowance).

As the Sunday Telegraph article (see above) implies, senior ministers are probably sympathetic to these points (though possibly not to Clougherty’s suggestion of paying for some of the reforms with a lower threshold for the 45p rate). However, having been burned by the attempt to scrap the 45p rate, and by the removal of limits on bankers’ bonuses, they will be wary about dipping further toes into anything which could be seen as ‘a giveaway to the rich’. The Chancellor was asked about high marginal rates at his Q&A on the fringe and responded cautiously. That’s why we’ve set out a tax review, he replied. He would not be drawn on specific measures under consideration but noted that the tax system has evolved over decades and there comes a point where it’s right to review how it is operating. For now, his focus is on growth.

The reference to making the tax system ‘better for families’ probably relates to the review Liz Truss promised during the summer into the way families are taxed, ‘to ensure people aren't penalised for taking time out to care for children/elderly relatives’. Media reports have suggested the review would focus on making more or all of the income tax personal allowance (rather than just 10% of it, as now) transferable between members of couples. This might be restricted to those with caring responsibilities.

This is something a number of think tanks have been pressing for. At a fringe meeting Luke Stanley, of Onward, urged the Government to take up his think-tank’s proposal (see Family Fortunes report) to extend the marriage allowance into a wider Family Allowance, to allow cohabiting couples with children as well as married couples to transfer 10 per cent of their personal allowance to their spouses. And to ‘radically’ expand the tax break by allowing certain families to transfer their full £12,570 personal allowance to their spouse.

DWP minister Victoria Prentis was on the panel with Stanley, and agreed that she would like the tax system to ‘make life easier’ for families, though she did not offer any detail. Prentis expressed concern that marriage is becoming something only done in ‘better off’ communities in the UK. She said, however, that there is a limit to how much the tax system can encourage people to marry and form families because of individual choice. In any case, she said, the priority of tax changes should be their impact on the wider economy.

Inheritance tax – polarising levy under review

Inheritance tax is another area of the tax system under review. Many Conservatives would love to abolish it, but can they afford to, and would they dare? Meanwhile there are signs the Government may be interested in liberalising the rules around non-doms bringing capital into the UK.

Andrew Griffith, the new Financial Secretary to the Treasury, made headlines during the conference by revealing he wants to see inheritance tax (IHT) abolished. Griffith told a CPS fringe event: “I have lots of my fantastic local association [members] with me here and they will know because they asked me at my selection meeting 27 months ago which tax, if I had the choice, I would most like to see eliminated. History will record it was inheritance tax.”

Former Conservative Party Treasurer Lord Spencer also said, in response to the same question, that he would like IHT to be scrapped. He called it ‘profoundly unpopular’ and linked it to people choosing to have domicile overseas. A lot of people came to the UK because of non-dom tax rules, bringing wealth here, he explained. The UK has lost a significant proportion of our non-dom citizens since current rules were put in place, he claimed, saying this was a sad loss to the UK. He went on to say that the UK needs to think through its position on IHT and non-doms. If we were prepared to be bold about them that would make a material increase in the amount of wealth that flows into our nation, he argued.

Apart from these comments, there was little mention of inheritance tax at this year’s conference, with most Conservative politicians wary of being further seen as the party of the wealthy. However Liz Truss told party members during the leadership contest that she would review the tax (as part of a wider tax review – see previous section), and IHT’s totemic hate status among a large part of the party and public means it is a lever she may be increasingly tempted to pull as we move closer to a general election, particularly if the Government is in need of a ‘game changer’.

The non-dom issue was debated elsewhere, however, including at a debate co-organised by The Spectator and the University of Warwick’s CAGE Research Centre titled ‘Should we have non-doms?’ Griffith was on the panel for this too, though his remarks were more cautious here, perhaps burned by the slight furore over his IHT comments. He said he was using the event as a listening exercise. When asked by the chair if non-doms are good for growth, he said only: “we have a belief in economic growth”.

Arun Advani of the CAGE Research Centre told the audience that it makes no sense to invite people to come to the UK as non-doms but for our tax system to then encourage them to invest outside the UK rather than here. Griffith said he understood this point and highlighted that the Chancellor and PM had been making positive noises about attracting people to the UK who can bring prosperity to the country.

Back in April, during the height of the furore over the domicile status of Rishi Sunak and his wife, Conservative MP Tobias Ellwood, Chair of the Commons defence select committee, did break ranks, calling for a review of non-dom tax rules. But with Sunak now just a backbench MP, the topic seems to have fallen off the media and political agenda.

Nevertheless, given the new administration’s agenda on growth and investment it is easy to imagine we may in due course see some relaxation of the rules regarding non-doms bringing wealth into the UK to invest.

All quiet (mostly) on the property tax front

SDLT has been cut, and business rates are being reviewed (again) but there seems little likelihood of structural reform of property taxation.

Debates over business rates are usually prominent during the party conference season, driven by sectors which feel hard done by such as retail and hospitality, and the MPs who are allied with them. However discussion this year was pretty limited. The Chancellor was asked about them on the fringe but would not be drawn on specifics, just noting that as a Business Minister, they were a levy he was frequently contacted about.

However business rates are part of the plan for investment zones (see below) and Liz Truss promised a review of them during the summer leadership contest. In early September Bloomberg reported that Truss is considering raising the threshold for relief from business rates raised from the current rateable value of £15,000 to £25,000. So it is very much a case of ‘watch this space’ ahead of Budget 2023.

The Government’s consultation on whether online sales tax should partly replace business rates has concluded but not yet reported. Chief Secretary Chris Philp was asked at the fringe whether we should assume that online sales tax is ‘dead in the water’, given the government’s agenda (which includes the promise of ‘no new taxes’). Philp would not be drawn.

The Government cut stamp duty land tax (SDLT) in the mini-Budget, in an effort to make buying a house more affordable. The threshold above which SDLT must be paid in England and Northern Ireland rose from £125,000 to £250,000. The threshold at which first-time buyers begin to pay residential SDLT increased from £300,000 to £425,000. (NB. SDLT is devolved in Scotland and Wales.) In his conference speech Housing Secretary Simon Clarke put the SDLT cut in the context of the Government’s wider housing plans, saying the cut would lift the ‘worst of the Stamp Duty burden’ and his soon to be published ‘vision to unlock home ownership’ would build on it. Liz Truss said the SDLT cut was part of ‘doing what we can’ to support home-owners.

Out on the fringe, at a Taxpayers’ Alliance debate on council tax, Paul Scully, Minister for Local Government, said frankly: “There’s never a good time to reform local government finance”. Observing that the fuss over the 45p rate showed the perils of tinkering with and simplifying the tax system, Scully said he believes that council tax remains the right way to fund local services. Reform will always create winners and losers, he opined.

The minister spoke in support of the idea of holding local referenda on excessive council tax increases. He said this could help to increase political accountability. He said ‘certain mayors’ would prefer to pass the political buck and blame central government, rather than be held accountable for their own decisions. Councillor Joanne Laban said that as leader of Westminster Council Nickie Aiken MP piloted a scheme where the highest value households were invited to make a ‘donation’ in their bills towards tangible local projects. She stressed that while it is the case that councils need more money, there also remains a lot of waste that needs to be addressed. Ben Bradley MP said ever-increasing council tax is unsustainable and governments need to look at other ways of saving money, like pooling services across council boundaries.