Budget roundup: Govt accused of breaking 2015 election tax pledge

UK Chancellor Philip Hammond on Wednesday stood accused of breaking a Conservative Party 2015 election manifesto pledge not to raise personal taxes after hammering the self employed with an increase in National Insurance contributions (NICs).

Delivering his largely low key Spring Budget, Hammond said class 4 NICs would rise to 10% from 9% in April 2018 and to 11% in April 2019 in effort to make the system "fairer".

The Conservative 2015 election manifesto said: "We will not raise VAT, National Insurance contributions or income tax."

Ministers rejected the accusation of pledge breaking by claiming the law in which it was enshrined did not specify which NIC classes were included.

However, tax experts said Hammond appeared to be targeting the entrepreneurial sector, which they said was a vital contributor to any economic recovery.

Kevin Nicholson, head of tax at PwC, said the significance of the move should not be underestimated and had "opened up a big potential money spinner" for the Treasury.

"The self-imposed tax lock is tying the government's hands, as the chancellor clearly wants to raise money but is committed not to do so from the main taxes of income tax, NIC and VAT. That means other areas of the economy will continue to see increases and tightening," he said.

On the macro-economic front, Hammond was able to produce some brighter news against an austere backdrop, as he revealed that growth this year would be 2% against November's forecast of 1.4%.

However, independent forecaster, the Office for Budget Responsibility (OBR) said growth would slow to 1.6% in 2018, before rising to 1.7% in 2019, 1.9% in 2020 and 2% in 2021.

There was a significant cut in OBR forecasts on public borrowing for 2016-17 to £51.7bn from £68.2bn forecast in November.

Borrowing will fall further in the financial year 2017-18 to £58.3bn and to £40.8bn in 2018-19, £21.4bn in 2019-20 and then £20.6bn in 2020-21, Hammond said.

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Hammond came under further fire for demolishing the tax free allowance on dividends less than a year after it came into force.

Investors will see their annual tax-free dividend allowance cut to £2,000 from £5,000 from April 2018 in a move that was forecast to raise almost £1bn in extra revenues by 2021/22.

Hammond said the current system was unfair, with most of the beneficiaries of the allowance company directors. The rest were investors with shareholdings of £50,000 or more, he added.

"It is also an extremely generous tax break for investors with substantial share portfolios. I have decided, therefore, to address the unfairness around director/shareholders’ tax advantage, and at the same time raise some much needed-revenue," he said.

Treasury estimates said the move would produce £5m in revenue in 2018/19, then £870m, £825m and £930m in subsequent years.

Chris Sanger, head of tax, EY, said those who have “just more than £50,000 in shares will now be caught up by a tax rise that is ostensibly targeted at owner managers".

“The cut in allowance will mean that a higher rate taxpayer receiving £5,000 of dividend income will now face almost £1,000 in extra tax. This will be a bitter blow for those who are relying on these savings to fund their retirement but who now find themselves as ‘collateral damage’.”

Elsewhere, Hammond shelled out £435m at to help offset a rise in business rates and avert a potential rebellion from Conservative MPs who were concerned that many small firms faced crippling increases from April 1.

He told parliament no business losing small business rate relief would see their bill increase next year by more than £600 annually. Pubs with a rateable value of less than £100,000 were given a £1,000 discount for 2017 - expected to affect 90% of those businesses.

There was also a £300m discretionary relief fund for local authorities to support companies struggling to pay the new rates.

Helen Dickinson, chief executive of the British Retail Consortium, said that the £435m cut was “a drop in the ocean” compared with the £25bn a year that the tax raises and that this was “another sticking plaster on a chronically ill patient – an unsustainable property tax higher here than anywhere in the developed world”.