Lib Dems pledge more tax cuts: after personal allowance raised to £12.5k will also increase National Insurance threshold

by Stephen Tall on August 14, 2014

Danny Alexander by Paul WalterToday’s big announcement from the Lib Dems has been the “plan to cut your tax bill further”. Here’s how The Guardian reports it:

The Liberal Democrats are to burnish their credentials as the tax-cutting party for the low paid by floating the possibility of cutting national insurance contributions for anyone earning below £12,500 a year.

In a challenge to David Cameron, who is facing pressure from Tory MPs to pledge bold tax cuts as the economy grows, the Lib Dems will promise in their general election manifesto to raise the level at which workers start to pay national insurance contributions.

Employees currently start paying national insurance on earnings above £153 a week, or £7,956 a year, at a rate of 12%. The Lib Dems say they hope to raise this to £12,500 by the end of the next parliament – bringing employee national insurance contributions into line with income tax.

The Lib Dems, who will beat the goal set out in their 2010 manifesto to raise the personal income tax allowance to £10,000 in this parliament, have already indicated that they will pledge to raise it to £12,500 by 2020. This means that no income tax would be paid on earnings below this level.

But Danny Alexander, the chief secretary to the Treasury, has gone a step further and said that the Lib Dems will work towards ensuring that no employee national insurance contributions are paid below this level. The Institute for Fiscal Studies has estimated that aligning the income tax allowance with employee national insurance contributions would lead to tax cuts for 1.2m employees.

Alexander said: “Our tax system must be fair and help to make being in work pay. That’s why cutting income tax for working people, particularly those on low and middle incomes, is a top Liberal Democrat priority. It was on the front page of the 2010 Liberal Democrat manifesto and we have fought to keep it on the agenda at every budget. By April next year we will have delivered a tax cut to over 26 million people worth £800 a year to a typical basic-rate taxpayer and taken over 3 million out of tax altogether.

“Now we want to go even further and lift the amount of money people can earn before paying income tax to £12,500. This will take hundreds of thousands more low earners out of tax altogether and give millions of working people a further tax cut of £400. This move will also give a tax cut to over 6 million pensioners. When we’ve reached £12,500 we will seek to raise the level that people start paying employee national insurance.

“These manifesto commitments will mean nothing less than a generational shift to a fairer tax system that rewards work and helps working people. That’s the way to build a stronger economy and a fairer society and ensure that everyone has the opportunity to get on in life.”

Three quick points:

1) It’s good to hear the party talk about National Insurance, a direct tax paid by many low-paid workers (as I suggested in February 2013: Focus next on National Insurance Contributions (NICs) – NOT the income tax threshold). Raising the threshold when it’s payable should be the priority if we’re serious about helping the lowest-paid workers.

2) However, calling for tax-cuts for the low-paid is the easy bit: working out how to fund them is quite another. As Adam Corlett noted here in January, the costs of raising the personal allowance are huge. The idea we could then also take low-paid workers out of NI is utterly unrealistic. Politics is about choosing and the party has chosen a tax-cut which won’t help the lowest paid.

3) And even if we could magic the money from somewhere to pay for both tax cuts within one parliament it will almost certainly be needed for public spending. Austerity isn’t going away: only a little more than half the cuts needed to eliminate the deficit have so far been identified. As I pointed out here, it’s projected there will be “an estimated 28 per cent cut in per capita day-to-day spending on public services between 2010-11 and 2018-19″. Better to avoid savage cuts to key services than to keep on cutting taxes regardless.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.