The prospect of a shock income tax cut has emerged after chancellor Jeremy Hunt failed to rule it out.
Mr Hunt said he wanted to put the country on “the path to lower taxes” but would “only do so in a responsible way”, as he prepares to unveil his autumn statement on Wednesday.
The chancellor had been thought to be proposing a cut to inheritance tax, but a backlash from Conservative MPs in the “red wall” north of England appears to have prompted a rethink.
Mr Hunt and Mr Sunak have been told such a decision would be seen as a hand out to the rich, costing them support votes among working class voters who backed the Tories in the 2019 election.
The possibility of an unexpected cut in income tax and national insurance now look on instead after reports that Mr Hunt and Rishi Sunak are “mulling it over”.
If confirmed, it would mark a major shift in the government’s strategy. They were thought to have been planning such tax cuts in the Spring Budget to woo voters in the run-up to the general election due next year.
A reduction in the basic income tax rate or national insurance would benefit millions more than slashing inheritance tax. It is also seen by many as a way of trying to erode Labour’s big lead in the polls by forcing Sir Keir Starmer to say if he would reverse any tax cuts if he wins power.
A cut in income tax would also help Mr Sunak shore up support among right-wing Tory MPs who have been demanding such action and who were furious at his firing of home secretary Suella Braverman.
However, a tax cut is not without political peril. Many economic experts have said that notwithstanding the chancellor benefitting from an enhanced fiscal “headroom” of £25bn – much bigger than his previously anticipated £6.5bn – it is too soon to risk big tax cuts.
Moreover, when Mr Sunak replaced Liz Truss in No 10 he promised that he would not repeat her reckless financial handling that caused a major economic crisis.
Senior Tory MP John Stevenson, chair of the Northern research Group, told The Independent: “Inheritance tax may be in need of reform, but it’s a distraction right now – far more important is reducing taxes for people on low incomes and businesses. That’s what will drive the economy forward.”
Jonathan Gullis, the MP for Stoke-on-Trent North, said that “now is not the right time for this [inheritance] tax cut”. The right-wing red wall MP argued that cutting the basic rate of income tax and increasing the threshold for the 40p rate would help families “really feeling the pinch”.
Leaving Tory advocate of tax cuts John Redwood described the possibility of an inheritance tax cut as “odd priority” – saying he would rather see income tax thresholds. The ex-minister is pushing for energy tax cuts, including VAT on domestic bills and carbon taxes paid by business.
Mr Hunt gave his strongest hint yet that he was ready to cut taxes on Wednesday – telling Sky’s Sunday Morning with Trevor Phillips: “We need to show there is a path to a lower tax economy.”
The chancellor would not be drawn on whether he could cut income tax or national insurance, but told the broadcaster spending cuts may be necessary to cut taxes. “If you want to bring down personal taxes the only way to do that sustainably is to spend public money efficiently.”
Pressed by the BBC’s Laura Kuennsberg on whether he intended to cut income tax, the chancellor declined to comment, saying “our priority is growth”. Mr Hunt did not deny an inheritance tax cut was under consideration. “Everything is on the table in an autumn statement,” he said.
The Sunday Times reported that Mr Hunt and the PM are now weighing up cuts to income tax or national insurance in an 11th-hour move. They are reportedly more focused on the headline rates of income tax, rather than thresholds.
Mr Hunt is also under pressure over a planned squeeze on benefits. Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7 per cent hike. But Mr Hunt has not ruled out using October’s far lower figure of 4.6 per cent, saving around £3bn.
Using the lower rate would affect the incomes of nine million low-income families, according to the Resolution Foundation. New analysis by the think tank said families some would lose as much as £500 a year.
Slashing inheritance tax – potentially by half – could be popular with some on the Tory right, but would only directly benefit a small proportion of the public.
A new report by the respected Institute for Fiscal Studies (IFS) report said an inheritance tax cut would deliver an average £180,000 windfall for millionaires. IFS director Paul Johnson said cutting inheritance tax would be “a very odd statement of priorities”.
Only around 4 per cent of deaths in 2020/21 resulted in inheritance tax being paid, with exemptions allowing many couples to pass on up to £1m tax-free. Inheritance tax is charged at 40 per cent on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants.
However, Tory MP David Jones, deputy chair of the European Research Group, urged Mr Hunt to focus on slashing inheritance tax, and corporation tax.
“Inheritance tax disproportionately impacts the middle class – it’s bitterly resented,” he told The Independent. “It would be a strong signal that we were returning to Conservative principles if it were completely abolished.”
Tory polling guru and peer Robert Hayward said Mr Hunt was “clearly” going to announce some form of tax cut – but predicted that the chancellor could defer it and set it out for the financial year beginning in April 2024.
Lord Hayward also announcing further tax cuts for April 2025 would leave a “bear trap” for Labour – forcing Keir Starmer’s party to explain whether it would reverse it if it wins the election expected in autumn 2024.
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The Tory peer said: “The chancellor has pleased the moderates in the party, he is now aiming to pacify the other factions. I don’t think an inheritance tax cut would be popular with the public. Of all the possible cuts in the headlines, it would be the most difficult to sell.”
Mr Redwood said there would be a major risk for Mr Hunt in setting out deferred tax cuts for 2024 and 2025. “It could be a hostage to fortune because people could try to find reasons for you not to keep your word,” he said.
Meanwhile, ex-chancellor Kwasi Kwarteng said Mr Hunt must announce tax cuts – whether this week or in spring – to give the Tories any chance at the next general election. “We can’t go into an election saying we’re going to just increase your taxes indefinitely,” he told GB News.
Former Tory cabinet minister Priti Patel called on Mr Hunt to “embrace Conservative values” and give voters a clear choice by cutting fuel duty, corporation tax and raising income tax thresholds.
Former Conservative minister David Gauke told the BBC that cutting inheritance tax while millions struggle risked “re-toxifying” the Tory party. And Labour’s shadow chancellor Rachel Reeves told Sky News that cutting inheritance tax seems an “unusual way” to help millions of struggling Britons.