One way in which tax policies have changed is through the considerable increases to the personal allowance threshold. Presently, an individual must be earning £11,500 or more per annum before paying any tax on their income. When the Coalition came to power in 2010, the personal allowance was £6,475. This reform was driven largely by the Liberal Democrats in the interests of fairness and protecting the least well-off members of society. Indeed, in the build-up to the 2015 General Election, Nick Clegg sought to distance himself from the Conservatives by stating that the Liberal Democrats would increase the personal allowance threshold further, in part to mitigate against the swingeing cuts made to the benefits system. Clegg argued: ‘the difference between the Liberal Democrats and the Conservatives is that we want to cut taxes for working people, paid for by the wealthiest, they want to cut taxes for the wealthiest, paid for by the working poor’.
The top rates of income tax have also changed. When the Coalition assumed office in 2010, the top rate of income tax for those earning £150,000 and above was 50%, in 2013 this was reduced to 45%. The top rate of taxation only affects only one per cent of the UK’s taxpayers, but it represents a considerable chunk of HMRC’s revenue from personal income (around 29%). In part, the government did to make the UK more attractive to internationally at a time when the reverse trend is apparent in other EU countries. Marc Burrows, head of international executive services at KPMG in the UK, said: “Dropping the UK’s top rate from 50pc to 45pc enhanced Britain’s attractiveness to internationally mobile executives. However, it should be noted that one could have predicted that the Conservative-led coalition would have cut the top band of income tax since they are ideologically inclined to being a low tax party.
Corporation tax has been reduced from 28% to 19% since 2010, making the UK’s rate of this tax one of the lowest in the EU. For both the Conservative and Liberal Democrat top brass this is understandable since both David Cameron and ‘Orange Book’ Nick Clegg were in favour of free market solutions to generate wealth. Governments since 2010 have been in favour of reducing corporation tax to make the UK more attractive to foreign direct investment and as such will increase government revenues, essential to paying down the deficit and ultimately reducing the UK’s eye-watering debt of £1.6 trillion. Gov.uk modelling suggests that the tax reductions will increase investment by between 2.5per cent and 4.5 per cent in the long term (equivalent to £3.6 billion – £6.2 billion in today’s prices) and GDP by between 0.6 per cent and 0.8 per cent (equivalent to £9.6 billion – £12.2 billion). The government argues that lower corporation tax will also increase the demand for labour which in turn raises wages and increases consumption. Given the share going to labour this equates to between £405 and £515 per household. Being globally competitive will be a more pressing concern for governments as the UK enters a post-Brexit world, although Corbyn has indicated that Labour would increase corporation tax to 26% if the party wins the forthcoming general election.
The Unit 3 Economy topic requires you to have an understanding of how governments manage the UK economy through taxation policy.