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cut taxes

Adam Corlett is a researcher at CentreForum and author of a recent report on National Insurance for the self-employed. 

It is largely forgotten now that the Conservatives had an early policy success in raising the employer National Insurance threshold (“stopping Labour’s job tax”). In the short term it may well have protected jobs; in the long-term the tax cut is likely to be passed on to employees through higher wages.

Even more regularly overlooked is that Tory plans to raise the employee threshold did not go ahead. Instead, the Lib Dem policy of raising the income tax threshold began in part “with the money that would have been used to pay for the increase in employee National Insurance thresholds proposed by the Conservative Party.” The Coalition missed an opportunity. Raising the income tax and National Insurance thresholds together – combining the yellow and blue plans – would have made the tax system simpler and done more for low income workers.

So it is extremely welcome that the Conservatives are reportedly “very likely” to offer higher National Insurance thresholds in their manifesto, as CentreForum suggested in January, rather than copying Liberal Democrat plans to further widen the threshold gap between NICs and income tax. It can only prove embarrassing for the Lib Dems that the Conservatives are set to help a lower income group of workers than them.

While the Tories may not need much help selling sensible, popular tax cuts, I’d like to offer one extra political argument: by raising the National Insurance thresholds, the Conservatives could take the absolute poverty line out of tax.

Currently, the government taxes incomes that fall below its own basic poverty line. For a lone taxpayer, the absolute poverty line will be around £10,350 in 2015/16 (rising with RPI inflation each year). Notably, the coalition has just raised the income tax Personal Allowance for that year to £10,500 (though this will rise with slower CPI inflation).

For a childless couple, the poverty line is around £7,800 per partner. Add a child and that goes to £9,300, or to £10,350 (again) for those with a teenage child. For those with multiple dependent children or for lone parents the poverty line is higher, but accounting for this is perhaps the job of child benefit etc., rather than the tax system.

All of which is to say that raising the National Insurance thresholds – which currently range from under £6,000 to around £8,000 – to the level of the Personal Allowance would ensure that direct taxes do not push low pay into poverty pay.

This tax cut would by no means be a comprehensive solution to British poverty – particularly if the policy were paid for through welfare cuts – with most of the money going to higher income families. But when considering at what point direct taxes should begin, the absolute poverty line seems a very reasonable baseline.

The thresholds for employees, employers and the self-employed should all be raised above the absolute poverty line. Increasing the threshold for the self-employed – and scrapping their separate poll tax (Class 2) – would be a cheap place to start, while the employee threshold is likely the most important politically. But the employer threshold should not be ignored either. As CentreForum and (now) Policy Exchange have both argued, this should also be increased and aligned with the Personal Allowance. This would even help employers deal with a higher minimum wage.

Before next year’s election, the Lib Dems will be arguing for a yet higher income tax threshold, and Labour for an absurd 10p band. Neither can claim that they would take the poverty line out of tax, and this is an opportunity the Conservatives should seize.

28 comments for: Adam Corlett: The Conservative manifesto should take those in absolute poverty out of tax

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