On Wednesday this week, George Osborne will announce the Budget, in which he can drop all sorts of bombshells, good and bad, upon UK taxpayers. Here are some of my ideas and predictions for what Osborne might or should announce.
Insurance Premium Tax
Insurance Premium Tax (IPT) is levied on most short term general insurance premiums in the UK, such as motor and home insurance. Like VAT, it is a tax on consumption, and the current rate is 6% of the gross premium, though there is a higher rate of 20% charged on some policies such as travel insurance. IPT cannot be claimed back in the same way that VAT can, and it is passed down the chain from the consumer to the insurer, who is responsible for accounting for the tax and passing it on to HMRC. According to HMRC’s figures, IPT brought in £2.4bn in the tax year 2010/11, not far behind Inheritance Tax and Spirits Duties.
In Osborne’s Emergency Budget, IPT was increased from 5% to 6% which, all things remaining equal, should have increased the tax collected by 20%, whilst increasing insurance prices by less than one per cent. My suggestion would be to implement a further one percentage point increase in this year’s budget, taking IPT to 7%. From a practical point of view, this has three major advantages. First and foremost, IPT is an existing tax, and it is generally easier to increase a rate than to introduce a new one, such as the proposed mansion tax. Secondly, since the tax is collected by HMRC from a small group of insurers – the ABI has around 300 members, and those account for 90% of premiums in the UK – it should be fairly easy for HMRC to implement an increase. Finally, as IPT has already been raised recently, we can be reasonably confident that the insurance industry has the flexibility in their IT systems to allow for the rate to be changed when a policy is due for renewal, although transitional relief would make implementing the change much easier.
The other consideration which Osborne might find appealing is a political one. Whilst the insurance industry screamed blue murder when the rate was increased in 2010, even though the tax is levied on the consumer so it does not directly impact their profits, no one else in the media noticed. Motor premiums were going up anyway, and I suspect many journalists have never heard of IPT, since it only applies to one industry – albeit rather a large one. So a small increase is an easy way to bring in perhaps £200m with little or no adverse publicity, surely a chancellor’s dream in any economic environment?
Abolishing the 50% income tax band
Osborne has bee under a lot of pressure from business and Conservative backbenchers to abolish the highest tax band. With the Liberal Democrats seemingly holding no opinion either way, provided that they get the personal allowance increase and perhaps a mansion tax, I think Osborne will probably make this the headline-grabbing announcement of his budget. Personally I am in favour of a band above the long-standing 40% one, but at the same time I think a marginal rate of 52% (income tax plus national insurance) is pushing at the boundaries of what is an acceptable level of taxation.
If Osborne wants a compromise, there are two options open to him. First, he could announce the abolition of the 50% band, but state that it will only come into effect at a future date, such as the 2014/15 tax year. This has the advantage of letting business leaders know that the band is on its way out, whilst continuing to bring in some income until the deficit has been sorted out. The other compromise is to keep the highest rate band, but reduce the rate, perhaps to 45%. That would provide a balance between cutting taxes and maintaining a progressive tax system whereby the more you earn, the greater the percentage of your income you pay in tax.
I’m not entirely sure who is in favour of the mansion tax, as sometimes it seems to be Vince Cable going it alone, whereas at other times it is touted as official Lib Dem policy. Regardless, it is a policy which seems to upset many Conservative backbenches, probably because their constituents would be hit by the proposal to tax properties worth over £2m.
Although I approve of a wealth tax in theory, I think the mansion tax needs more thought before it is implemented. As it stands, there are two major problems. First of all, there will be older people living in the South East who bought what was originally a modest property several decades ago, but is now worth a substantial amount due to house price inflation and infrastructure improvements (e.g. the extension of the London train network). Whilst these people have paper wealth, their income, and therefore their ability to pay the tax, might be very low. There are ways to get round this problem, such as deferring the tax charge and then taking it from the estate at death, but they need to be thought through and costed before a new tax is implemented.
The second problem with the mansion tax is that someone with a property worth £2m would pay the tax, but someone with half a dozen buy to let properties in London, each worth less than £2m individually but perhaps several million in total, would escape paying it. This is similar to the problem of withdrawing child benefits based on the income of one parent, and I’m not sure whether it can easily be resolved. However, I would certainly like to see the Treasury explore the option of a levy on residential properties based on the value of a portfolio, as opposed to just individual properties.