Tax Cuts Can Be Complex: Can They Achieve What They Are Meant To?

Jackie Hall is a tax partner and technical officer, covering private client and employment taxes at RSM considers if tax cuts can achieve what they are supposed to.

Alongside the cost of living crisis, individuals are also faced with some of the highest tax rates in decades. Whilst many are calling for tax cuts to help families cope, it is important to recognise the complexities of the UK tax system mean that it is particularly challenging to direct such cuts in a fair and proportionate way. Should all taxpayers be better off? In which case, public spending will likely have to be reduced, or borrowing, which is already at a record high, will need to be increased further. Or should tax cuts be directed to those who may benefit the most, and paid for by tax increases elsewhere?

The recent increase in National Insurance contributions, swiftly followed by the increase in thresholds provides a good example of how unfair (or otherwise) tax changes can be. The original increase in contributions, applied from April 2022 to all employees (and employers) equally. But the negative impact on those at the lower end of the earnings scale was disproportionate in that an individual already struggling to pay necessary bills was still expected to contribute more out of their income, whereas higher earners who were better placed to contribute were less likely to suffer any substantial drop in their standard of living as a result of the increase.

However, the increase in thresholds in July 2022 will quite rightly benefit those at the lower end of the earnings scale more. That said, although some will be better off overall after the threshold increases in July, many will simply be in the same or worse position than they were in March 2022. Furthermore, neither of these changes did anything to address the issue of income from earnings being taxed more highly than income from wealth.

Perhaps the focus should shift from tax cuts for all, to sharing the tax burden more fairly? If, for example, capital gains tax rates were increased, the tax burden may shift from work to wealth, but even then, overall, the wealthy individual with property in the South will still benefit more from the increase in property prices than most individuals that own property in the North.

The Chancellor’s tax plan promises to review existing tax reliefs and allowances and reform them to make the tax system simpler, fairer and more efficient. That suggests the way taxes are raised should be seen to be fair to all, be that between those who earn and those who have wealth from savings, between lower earners and those established in high paying careers and even on a regional basis. That is quite frankly an almost impossible task.


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