Tory leadership contest: Do tax plans add up?

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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

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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.

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 would gain a maximum of £3,000.

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.

Dominic Raab

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Dominic Raab’s tax changes would be brought in over five years

The plan: To cut the basic rate of income tax from 20% to 15%.

What it means: Mr Raab says he wants to reduce the basic rate of income tax from 20p in every pound to 15p.

The basic rate of tax is paid by those currently earning between £12,501 and £50,000 a year.

Under Mr Raab’s plans, the basic rate of tax would fall by a penny a year – until it reaches 15p.

In addition, Mr Raab wants to raise the point that people start to pay national insurance, so that it’s the same as income tax (ie £12,501 a year).

The policy would mean a tax cut for the majority of UK workers. There are currently 26.3m basic rate taxpayers in the UK, according to HM Revenue and Customs.

However, the policy would be expensive. The IFS says it costs about £5bn for every 1p cut in the rate of income tax.

On top of that, Mr Raab’s pledge to align the starting rate of national insurance with income tax would cost about £10bn a year.

Like Boris Johnson, Mr Raab says this could be paid for by the government’s £26.6bn “fiscal headroom”. Therefore, he will also need to find other means of funding his tax cuts to keep them sustainable in the long term.

Michael Gove

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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.

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