New thinking for Labour on taxes?

New proposals for reforming capital gains and income tax have been published by an influential think tank which could make their way into an election manifesto.

The Institute for Public Policy Research (IPPR) is “the UK’s pre-eminent progressive think tank”, according to its website. This may sound like boasting, but it is probably a fair description of the IPPR’s position in the nerdy world of political think tanks.

Unsurprisingly, its thoughts regularly work through to become Labour Party policy and, less frequently, are also ‘borrowed’ by other political parties. It is therefore worth taking note when the IPPR publishes proposals on personal tax reform, which it did in September. With an election apparently drawing ever closer, the IPPR’s ideas assume even greater relevance.

Its latest proposals, in a paper entitled, “Just tax: Reforming the taxation of income from wealth and work” focus on two areas.

Taxing capital gains

The IPPR starts from the premise that “that income from wealth should be taxed the same as income from work”. This translates into a plan to:

• tax capital gains as income;
• scrap the capital gains tax (CGT) annual exemption of £12,000 and replace it with a minimal allowance of perhaps £1,000;
• remove the CGT exemption which currently applies on death; and
• withdraw most CGT reliefs, other than those for an individual’s main residence.

The IPPR floats the possibility of reintroducing some allowance for inflation (remember indexation relief?) or a minimum rate of return linked to 10-year bonds (which currently yield about 0.6%).

Income tax and National Insurance Contributions (NICs)

The IPPR proposal here is more radical and will affect many more taxpayers:

• Income tax and NIC rates should be merged to produce one rate, which applies to all income, from whatever source;
• The personal allowance should be reduced to bring it into line with the starting point for NICs (about £8,600); and
• Tax rates should rise gradually, rather than using the current band approach. For example, the IPPR suggests the rate could start at 2% and rise to 50% on income above £100,000.

If this system were adopted on a tax-neutral basis, that is, producing the same income for the Exchequer as the current structure, the IPPR says that “around 80%” of taxpayers would see a rise in take home pay. The obvious corollary goes unmentioned.

If you needed a reason to revisit your tax planning now rather than later, the IPPR may have just supplied it…