The Queen’s Speech yesterday included a commitment that "Legislation will be brought forward to ensure people working 30 hours a week on the national minimum wage do not pay income tax, and to ensure there are no rises in income tax rates, value added tax or national insurance for the next five years."
This gives effect to commitments entered into by the Conservative party before the General Election.
The income tax personal allowance
The measure to prevent individuals on the national minimum wage (NMW) paying income tax will take the form of a link between the level of the NMW and the income tax personal allowance. The government has also reiterated its commitment to raise the allowance to £12,500 by the end of the parliament, but the NMW link may take it above this figure. Currently the allowance is £10,600.
At current rates an individual working 30 hours per week on the minimum wage will earn £10,140 a year and will not in any case pay income tax. The measure will, however, give scope for expected increases in the NMW.
The ‘tax lock’
The ‘tax lock’ will give a statutory assurance that:
The status of the legislation
- there will be no rises in rates of income tax, VAT or national insurance contributions (NICs);
- the NICs upper limit (at which the employee rate reduces from 12% to 2%) will be no higher than the threshold at which income tax increases to 40%. (There is a commitment, though not within the proposed legislation, to increase this threshold to £50,000 by the end of the parliament);
- there will be no extension of the scope of VAT.
Linking the personal allowance to movements in another figure is a simple legislative matter; existing rules already provide a link to the consumer prices index. The ‘tax lock’ is a more unusual measure. Having decided not to take the above steps the government could have contented itself with simply saying so, rather than passing legislation to prohibit itself from taking those steps. It is thus a presentational matter, giving the government an opportunity to stress how seriously it takes this commitment. Strictly speaking, there would be nothing to prevent it bringing forward legislation in the future to repeal this measure, but that would be very difficult politically.
Other tax measures expected
The measures included in the Queen’s speech are by no means all the tax changes intended by the Government. Further details of other changes will be given in the Budget scheduled for 8 July, which will be followed by a further Finance Bill. Measures announced before the election include:
- Corporation tax – the maintenance of ‘the most competitive business tax regime in the G20’, which suggests that the rate of corporation tax will not rise from the current 20%.
- Capital allowances – a ‘significantly higher’ permanent level for the Annual Investment Allowance, which currently stands at £500,000 but is due to revert to £25,000 from 1 January 2016.
- a reduction in tax relief on pension contributions for people earning more than £150,000. No details have yet been given of how this will work;
- a reduction in the lifetime allowance for pension contributions from £1,250,000 to £1,000,000 with effect from 6 April 2011
Inheritance tax –
a transferable main residence allowance of £175,000 per person. The intention is that, together with the existing transferable £325,000 nil-rate band this will enable a couple to transfer a home worth £1,000,000 to their children tax-free.
What are the government’s options?
- National insurance
- the abolition of Class 2 (fixed-rate) NICs for the self-employed and the introduction to Class 4 (profit-related) contributions of a new test as regards eligibility for benefits;
- the abolition of employers’ contributions for apprentices under 25.
- Individual Savings Accounts (ISAs) – the introduction from Autumn 2015 of a new Help to Buy ISA for first-time homebuyers, with a government supplement to savings.
By these commitments the government has significantly restricted its scope for increasing the tax burden. If tax revenue is to increase, therefore, this will have to come in part from increased economic activity.
For further information please contact a member of our tax team
Business Tax team
Private Client Tax team