By Richard Tyler, Associate Dean and Senior Lecturer in Accounting and Finance at Liverpool Hope University
At its heart, taxation has to grapple with the concepts of ‘fairness’ and impact.
On the whole, people face a similar battle between selfishness and society – we want to live in a modern environment with safety nets for basic needs, accessible education and healthcare and the ability for the country to defend itself. We are also, on the whole, happy to contribute to that, but only if everyone else is and as long as it is proportionate. The crux being that each of us might look over the neighbouring fences and have a different idea of what that proportionality is.
Governments need to balance spending and achieving goals with the income raised through taxation, but the nature of democracy and the electoral timetable also put a horizon on demonstrating outcomes and potentially pressuring short term impact over longer term ambition and structure.
All this, while inflation and energy price rises driven by international conflict, put pressure on both individual and government spending.
So, what does that mean for today’s budget?
In terms of raising Government income these elements get the most traction in discussions as they impact our earning and spending on a day-to-day level, but there are also a number of limits within which the Government are working.
Commitments to maintaining (ie not raising) income tax rates and bands, National Insurance and VAT mean that decisions that will impact people’s earnings and influence spending choices are limited.
Similarly, the personal allowance remains frozen, and the resulting impact (called ‘fiscal drag’) is discussed at length in many places, but essentially by keeping the amount someone can earn tax free the same, while generally inflation pushes earnings up, means that more of your earnings become taxable and more people move into higher bands.
Imagine being given a pound (tax free!), feels good sure, but how much difference would that make to you? But what if everyone in the country gave you a pound, what would that look like, and what could you do with it? That is the decision Government faces with allowances.
One headline is the removal of standing charges for gas. While this will take time to implement, it is a measure that rewards attempt to use less energy and protects households that can reduce energy usage, with a higher price per unit meaning that higher users effectively subsidise lower users. This, however, is against the backdrop of price increases generally, and the price cap rise in January 2027. So, a measure that brings elements of relief and control to those most in need as costs rise, while not necessarily reducing the burden of fuel cost from household finances. Energy costs continue to be recognised as a driving factor in cost of living, with extension to the £100 payment against energy bills for lower income families.
To fund measures, the largest impacts are the increase to surcharges on bank profits, a temporary 3% increase on top of the current 3% charge, balanced to raise income without penalising profitability and with the background of the increase in corporation tax (on top of which the surcharge is applied) two years ago, as well as acceleration of proposed increases to the tax rates for property income from April 2027.
This targeted income generation for government enables other measures (the ‘impact’), but as the decisions become more complex and differentiated this impacts fairness. In effect, saying that banks that make a profit will be treated differently to other business that make a profit, and those who generate income from property are treated differently to those who generate the same income as an employee.
The counter argument is that banks enjoy the economic environment created to enable those profits, and that those who own multiple properties to generate income are more able to contribute to the society that has enabled that growth. Interestingly this budget that has limited major interventions or longer term impacts draws more attention to the balance required in the setting and understanding of tax rules.
To encourage saving, the proposed reduction to cash ISA annual limit £12,000 has been removed, meaning the £20,000 limit to invest tax free remains, offset by proposed increases to the tax rates for taxable savings income from April 2027. This achieves some measure of equity by providing the opportunity for savings to generate interest without impacting tax, but raising the tax impact on savings beyond that limit or potentially for those who need to access savings more regularly.
The budget has focused on what has been referred to as ‘do no harm’ measures, to avoid impacting wider modest economic growth with smaller scale support and targeted measures rather than income generation. Defence spending has been committed to increase to 3% of GDP by 2030, and with no dramatic income generation measures, the balance moves to achieving aims without overspending. In terms of spending, the pressure will be moved to the departmental spending review next year, and how realistic the real term cuts proposed are.