Newsroom & speeches
Dealing with the record budget deficit is the greatest economic challenge this Government faces. The bulk of the deficit reduction will be achieved through reductions in spending but tough choices also have to be made on tax.
The Government received many comments on the tax proposals set out in the Coalition’s Programme for Government, including suggestions on tax policy and administration.
Most of the responses recognised that tax must make a contribution towards reducing the deficit and there were a number of suggestions regarding which taxes to increase. These included raising VAT, Income Tax, and National Insurance Contributions (NICs) for higher earners. There was also support for the Government’s proposal to introduce a new tax to be paid by banks.
A number of responses on VAT suggested a raising the rate on unhealthy foods. The Budget announced that the standard rate of VAT would increase to 20 per cent in January 2011. The Chancellor also said that, as part of the Government’s commitment to fairness, household essentials such as food and children's clothing, as well as other zero-rated items like newspapers and printed books, would remain zero rated over the course of the Parliament. Many snacks and confectionary products (such as sweets and chocolate bars) are already standard rated for VAT.
The Budget also announced that the Government will introduce a new bank levy, designed to raise around £2.5bn a year. A period of consultation for the design and implementation of the bank levy began on Monday 13 July and will end on 5 October.
There was broad support for an increase to the personal allowance in the responses that were received. The Budget announced an increase of £1000 to the income tax personal allowance from 2011-12, as a first step to the stated commitment. This will remove around 880,000 of the lowest earners from income tax altogether and 23 million basic rate taxpayers will benefit from up to £170 a year. As stated in the coalition agreement, raising the personal allowance to £10,000 remains a long-term objective and this increase is a substantial first step towards achieving this goal.
Many comments on capital gains tax were submitted. Suggestions included the need for any increase in rate to be accompanied by a taper, or to make allowances for indexation.
The Government inherited a wide gap between the rate of capital gains tax and the top rate of income tax, which was estimated to be costing over £1billion every year in lost tax receipts. The Government was careful to consider all the options before making a decision. At the Budget the Chancellor announced an increase in the rate of tax paid on capital gains, by higher rate tax payers, to 28 per cent. A 28 per cent rate does not exceed the rate which would maximise revenue and keeps us in line with our international competitors. Options for introducing tapers or indexation allowances were considered but the Chancellor concluded that the complexity and administration involved would have been self-defeating.
Finally, a common theme in the comments received was the need for a simpler, more predictable and more transparent tax system, with a fair focus on tackling tax avoidance. The Government supports these aims and is committed to simpler tax system. The Government has recently announced details of an independent Office of Tax Simplification.