Tory leadership hopefuls and their potential tax policies

Five Conservative MPs are currently in the running for the top job and their campaigns are in full swing.

With soaring inflation, concerns over a larger-than-expected jump in energy prices later this year and a hike in interest rates, tax has become one of the biggest issues debated.

Potential tax changes include cuts in income tax, scrapping the social care levy, and cutting VAT on energy bills.

Five MPs are still in the running for Tory leader, as of today (July 14), their potential tax policies are outlined below.

Penny Mordaunt

Trade minister Penny Mordaunt said she will increase income tax thresholds for basic and middle income earners in line with inflation if she wins the Tory leadership vote.

In an op-ed for The Telegraph, Mordaunt said she rejected the “oversimplification” of how the current economic challenges are addressed.

As tax cuts go, reducing the basic rate of income tax will be incredibly expensiveChris Etherington, RSM

She outlined that she will drive growth and competition, but will pioneer “sound money” and will implement fiscal rules to ensure that debt as a percentage of GDP falls over time.

Mordaunt also said she will work with the Bank of England to focus on getting inflation under control, noting its independence from the government. 

Tax simplification is important, she added, to reduce the “bureaucratic burden” on taxpayers.

“Cutting tax is welcome, however this must be accompanied by a programme of economic reform, with a critical focus on competition,” she said.

Income tax currently accounts for £228bn of the £916bn raised by the Treasury each year, with a cut of 1 per cent equating to £5.25bn less for government coffers each year.

For a salary of £26,000 a year, a 1 per cent tax cut would result in a £134 saving.

I don’t cut taxes to win elections, I win elections to cut taxesRishi Sunak, MP

Chris Etherington, partner at RSM, said: “As tax cuts go, reducing the basic rate of income tax will be incredibly expensive. 

“It is an eye-catching and a relatively simple measure to implement but its benefit will be heavily diluted as it is spread across all taxpayers.”

Finally, Mordaunt has signalled she will cut fuel duty by 50 per cent, to be funded by the increased tax revenues from VAT due to inflation.

Rishi Sunak

In his resignation letter last week, Sunak hinted at prior clashes with Boris Johnston over tax changes, and the former chancellor has warned the other leadership contenders against making unsustainable tax cuts.

One aspect of the argument has been reported to be Sunak’s refusal to cut corporation tax.

Business leaders have hit out at the potential policy, saying it is a tax levied on profits at a time when many companies are facing recession.

The 2016 budget announced corporation tax in 2020 will be reduced to 17 per cent, however before the pandemic it was announced that it will be held at 19 per cent. 

From 2023, that rate is due to be increased to 25 per cent.

Corporate tax lawyer at RSM, Hannah Lloyd, said as a revenue raiser, corporation tax is a "blunt tool".

"If it increases too much above that applied by other countries with relatively similar legal systems, infrastructure, and perhaps more appealing incentives that reduce the overall tax base, it can have a disproportionate impact on attracting foreign investment which has wider reaching implications for other tax revenues such as VAT and employment taxes," she said.

The global minimum tax rate of 15 per cent has been signed up to by nearly 140 countries, she added, and with no other major economies raising their tax rate to such a degree, persevering with the proposed increase could be deemed "unecessary". 

"When you consider that less than 5 per cent of the total tax revenues in the UK are derived from corporation tax, it starts to look unappealing."

Sunak told the BBC’s Today programme this morning that “of course” he wants to deliver tax cuts.

“But we will do that in a measured way,” he said.

“I will get taxes down in this parliament, but I’m going to do so responsibly because I don’t cut taxes to win elections, I win elections to cut taxes.”

Sunak has been branded a “socialist chancellor” after a large amount of monetary assistance was given to the UK population during the pandemic. 

However, he has indicated that an effort to reduce the tax burden is a case of "when not if".

Liz Truss

Truss has ruled out an increase in corporate tax, and has said she wants to scrap the social care levy that came into effect earlier this year.

The levy, a 1.25 per cent tax on income, could cost the public purse over £17mn if it is scrapped in April next year, said Etherington. 

“Such a measure is unlikely to significantly benefit average households and families,” he said.

“The statistical evidence published at the time the levy was announced suggests that it is the highest-income households that will be hit hardest by it. 

“The 20 per cent highest-income households will contribute more than 40 times that of the 20 per cent lowest-income households.”

Although this is a “bad tax”, and getting rid of it sounds good, founder of Tax Policy Associates Dan Neidle said Truss would have to work out how to pay for it to be cut.

“It is really an increase on national insurance,” he said, “and that is paid on some forms of income and not others.”

NI is not paid on income from dividends, and those who are self-employed pay less NI than those working for a company.

“NI is broadly progressive when you are looking at people who are employed, but across everyone as a whole, it is under-tacing those on the highest income.”

Kemi Badenoch

Kemi Badenoch, MP for Saffron Walden and a former minister for local government, faith and communities and of equalities, has given the least detail of her potential tax policy.

In a speech earlier this week, Badenoch said although she can understand why there have been “lots of promises” to cut taxes, she will not enter into a “tax war”.

Everyone wants tax cutsDan Neidle, Tax Policy Associates

“With economic growth faltering and the highest tax burden in decades, it is right that we ask how we reduce taxes on businesses, families and individuals,” she said.

Badenoch said she is committed to reducing corporate and personal taxes but would not enter into a tax bidding war.

“To make promises you cannot keep is a betrayal of everything I stand for,” she added.

Kadenoch said she would instead be focusing on a “system change” to focus on tackling inflation and the cost of living crisis.

The problem with proposing tax cuts, said Neidle, is that they have to be paid for.

Tom Tugendhat

Tugendhat, who has never held a position in government, has been called a "natural tax cutter" by supporters.

He has said he is committed to "reducing the tax burden" on people and businesses across the UK. 

"It is great to see colleagues following my lead in arguing for a reversal of the national insurance rise."

One of the former Army officer's policies would be to cut fuel duty by 10p per litre.

"It is another bad idea," said Neidle.

"A lot of [the tax cuts] will not be passed on," he said, adding that there has been academic research conducted on previous fuel taxes which shows around a third of the tax cut typically gets passed on.

"The second reason not to do it is that most of the benefit will go to wealthy people."

Other cuts

Other tax cuts that have been mentioned include cuts to VAT on energy bills.

Neidle said this was a bad idea, for two reasons.

“First, a lot of the cut will not be passed on by energy companies, they will snaffle it,” he said.

Secondly, most VAT on energy bills is paid by people with the highest bills, meaning wealthier people.

“So it is a very inefficient way of helping people who are struggling to cope with high energy bills,” he said. 

“We should be cutting taxes for those on low income and increasing benefits for those on lower or no income.”

Ultimately, said Neidle, the problem with proposing tax cuts is that they have to be paid for.

“Everyone wants tax cuts,” he said.

“As soon as you point to the thing that you have to cut to fund it, suddenly the tax cut is less popular.”

Lloyd added that regardless of which candidate is appointed, we should spare a thought for finance teams across the country.

"With each new enacted rate...[including those] that never actually came into effect, those teams have to carry out extensive and often complex calculations to revalue the tax liabilities and assets that will crystalise in future periods that are required to be included in their companies’ balance sheets."

sally.hickey@ft.com