UK Politics

Tory leadership contest: Do tax plans add up?

Money and a calculator Image copyright Getty Images

In the race to succeed Theresa May as prime minister, Conservative leadership contenders are setting out how they want to run the UK.

But what are some of the candidates saying about tax and spending, and do their sums add up?

Boris Johnson

Image copyright Getty Images
Image caption People would only start to pay the higher rate of income tax when they earn at least £80,000, under Boris Johnson's plans

The plan: To raise the higher income tax rate from £50,000 to £80,000.

What it means: At the moment, individuals have to pay 40% income tax on any earnings above £50,000. So, a person earning £55,000 a year, pays 40% on £5,000.

Under Mr Johnson's plan, the point at which the 40% higher rate kicks in would be raised to £80,000. This would not affect Scottish workers because the Scottish government sets its own income tax rates and bands.

Mr Johnson also wants to raise national insurance - to absorb some of the cost.

National insurance is a separate tax. It's only paid for by workers and companies and it is meant to fund state benefits, such as the NHS.

Under this new tax regime, someone earning £60,000 a year could benefit by £1,000 a year; while someone on £80,000 or more would gain a maximum of £3,000 (because some of the benefits would be lost due to national insurance increases).

But it's wealthy pensioners who stand to benefit the most, up to £6,000 each according to analysis from the Institute for Fiscal Studies (IFS). That's because pensioners don't pay national insurance to begin with.

So if someone already receives a generous work pension, not only will they be subject to less income tax (up to the new threshold), they also won't be affected by the national insurance rise.

Changing the tax system in this way would cost around £10bn a year, according to Mr Johnson. He says the bill could be funded from the £26.6bn of "fiscal headroom".

This "headroom" refers to government borrowing, which came in lower than originally expected and had been ear-marked by the chancellor for no-deal Brexit planning

However, if Mr Johnson chooses to fund his tax changes with this lower borrowing, it would not amount to a permanent solution. That's because the money can only be spent once.

So, to pay for the policy in the long-term, Mr Johnson will need to raise taxes elsewhere, announce spending cuts or continue to fund it from government borrowing.

Michael Gove

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Image caption Michael Gove would replace VAT "with a lower, simpler, sales tax"

The plan: Scrap VAT and replace it with a sales tax.

What it means: VAT, or Value Added Tax, is the tax customers pay on most goods and services. The standard rate is currently 20%.

Under Mr Gove's plans, VAT would be replaced "with a lower, simpler, sales tax".

The difference between VAT and a sales tax is essentially administrative. With a sales tax, the 20% would only apply when an item is finally sold to a consumer.

With VAT, businesses still have to pay it when they sell goods to one another, and then claim the money back. In theory, under this new system, businesses would have less administration, which could help them become more productive.

The problem, however, is that businesses could be given an incentive to claim they were selling products to other businesses (rather than consumers) in order to evade the new sales tax.

The IFS says this fear over evasion has driven every country in the Organisation of Economic Co-operation and Development (OECD) - apart from the United States - to move away from a sales tax and towards VAT.

In the UK, VAT raises £140bn a year - so reforming such a big revenue-raiser could be risky if it doesn't go smoothly.

Jeremy Hunt

Image copyright EPA

The plan: To cut corporation tax to 12.5%

What it means: From April 2020, instead of paying 17% tax on their profits, companies would pay 12.5%.

The foreign secretary is in favour of cutting the rate of corporation tax, which is the tax that companies pay on their profits, to 12.5%, which is the same rate as they have in the Republic of Ireland.

The government is already planning a series of cuts to corporation tax, which was cut from 20% to 19% on 1 April 2017, and is scheduled to fall to 17% next year.

The suggestion to cut it by another 4.5 percentage points came in a report by another Conservative MP at the end of May. The report was welcomed by five of the leadership candidates. Mr Hunt has specifically referred to the corporation tax cut in interviews.

The government estimates the policy would cost about £14bn a year. That cost would be reduced if future tax takes were to be boosted by companies being attracted to move to the UK to take advantage of the lower tax rate, or if companies use the money saved to pay higher wages or invest it in improving their productivity.

How much that would reduce the cost is very hard to predict.

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