Interactive Investor

Six taxes new chancellor Nadhim Zahawi could cut

6th July 2022 13:25

Alice Guy from interactive investor

The new chancellor Nadhim Zahawi is determined to cut taxes and make the UK competitive for business. Alice Guy examines six taxes he could cut and explains why fiscal drag is hitting our finances.

We could do with some good news at the moment. And, perhaps surprisingly the collapse of Boris Johnson’s cabinet could spell some relief for beleaguered taxpayers.

Last night’s joint resignation of Rishi Sunak and home secretary Sajid Javid ushered in a new chancellor, and he’s “determined to do more” to cut taxes, commenting that, “I want to make sure we’re as competitive as we can be while maintaining fiscal discipline.”

With a potential general election around the corner and inflation running hot, we take a look at six taxes the new chancellor Nadhim Zahawi might look to cut.

1) Corporation Tax

Corporation Tax is destined for a hike in April 2023, up from 19% to a whopping 25%. It’s a controversial rise, and one that will see the UK lose its competitive edge over many European countries. The UK currently has one of the lowest rates of Corporation Tax, but with the tax hike it will jump to one of the highest.

Cancelling this tax rise could cost the Treasury around £17 billion per year by 2026, but it will also encourage foreign investment in the UK and would help the new chancellor keep his pledge: “I want to be one of the most competitive countries in the world for investment.”

2) VAT

Will Nadhim Zahawi bite the bullet and confirm rumours of a cut to VAT? Cutting VAT from 20% to 17.5%, or even 15%, would be politically popular and provide an immediate relief to consumers and stimulus to the economy. On the other hand, critics argue that reducing VAT could further stoke inflation and exacerbate the economic crisis.

Zahawi's thinking could be shaped by the actions of a previous Labour chancellor, Alistair Darling. In 2008, he cut VAT from 17.5% to 15%, an approach credited with helping the UK economic recovery.

It’s a tough call for the new chancellor and one he’ll need to make quickly, with Boris Johnson’s political future hanging in the balance.

3) National Insurance

If it ain’t broke, don’t fix it! That’s a truth that Rishi Sunak has learnt to his peril over the past few months as constant tinkering with the National Insurance rates and thresholds have proved politically damaging.

Sunak’s recent announcement on raising the National Insurance threshold will lift some lower earners out of the tax. But ii’s recent research shows that middle earners on £30,000 will actually pay an extra £638 National Insurance per year by 2026, due to the 1.25% tax uplift in April 2022 and the impact of fiscal drag over time as tax thresholds lag behind wage rises.

To help us fight against rising costs, Zahawi could lift the National Insurance thresholds in line with inflation, rather than sticking with Sunak’s policy of freezing tax thresholds until 2026.

4) Income tax

With inflation currently at 9.1% and predicted to rise further by the autumn, more of us are wising up to the impact of fiscal drag on our finances. Like National Insurance, the Government’s current decision to freeze the income tax thresholds means that more of us will be paying higher-rate tax by 2026. Our research shows that someone earning £50,000 will have to pay an extra £3,818 in Income tax by 2026 and even a middle earner on £30,000 will owe an extra £1,178 by 2026.

Instead, Zahawi could decide to raise the basic and higher-rate income tax thresholds in line with inflation, helping us keep more of our hard-earned cash and shielding us from the cost-of-living crisis.

5) Higher Rate Child Benefit Charge

With wages increasing, the Higher Rate Child Benefit Charge is expected to affect many more families over the next few years. It works by clawing back Child Benefit for families where one parent earns more than £50,000 and costs up to £1,885 if you have two kids.

This £50,000 limit has been frozen since it was introduced in 2013 and is hitting more and more middle-income families. And in couples where finances aren’t shared, it’s mainly women who suffer from this policy: they often use Child Benefit to supplement their lower earnings.

With childcare in the UK one of the most expensive in the world and the cost-of-living crisis hitting the real income of many families, the new chancellor could help low-earning partners by revising this out-of-date and punitive policy.

6) Inheritance tax

Long known as Britain’s most unpopular tax, inheritance tax has had its nil-rate band frozen at £325,000 since 2009, longer than my lovely 12-year-old has been alive. This slowly creeping tax is affecting more and more estates as average property prices are up 80% since 2009.

Raising the inheritance tax nil-rate band in line with inflation would help homeowners to pass on more of their carefully stewarded wealth to their children and grandchildren.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.