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Insurance industry

Coalition Agreement Brings Sweeping Tax Reforms Amid Fiscal Restrictions

Strategic Insights

— 1 min read

The Conservative-Liberal Democrat coalition has agreed on the most significant tax reforms in decades, which will drastically change the tax landscape for millions of people in the UK. The reforms aim to increase the personal allowance, effectively freeing tens of millions from paying income tax. However, capital gains tax will more than double, and the plans to cut inheritance tax have been put on hold. The coalition also signals intentions to tackle tax avoidance, impose a banking levy, and raise tax credits.

Key Takeaways:

  • The coalition agreement includes a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes, potentially benefiting around 3.6 million people who would escape the grasp of HMRC if the threshold is raised from £6,475 to £10,000.
  • The joint document states that the coalition will seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, effectively more than doubling the current rate of 18%.
  • The reforms abandon plans to cut inheritance tax, and people are advised to write a will and take advantage of the various IHT reliefs currently available.
  • Employers will not see increases in National Insurance contributions (NICs), but employees will still face the Labor-introduced increase from next April.
  • The coalition will phase out the default retirement age, and younger employees will have to work longer before retiring.
  • The plan to raise the threshold for inheritance tax (IHT) from £325,000 per person to £1m has been dropped.

Statistics:

  • 3.6 million people could potentially escape paying income tax if the threshold is raised from £6,475 to £10,000.
  • The cost of raising the threshold to £10,000 would be around £17bn.
  • The joint document mentions the intent to chop the capital gains tax threshold from its current level of £10,100 to £2,500, but this is not expected to take effect immediately.
  • The new capital gains tax rate is expected to be above 18% and could be accompanied by additional relief for entrepreneurial investments.

Sources:

  • The Times ("Tories and Lib Dems agree on the biggest tax cuts for decades")
  • The Guardian (as cited in The Times)

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