Thursday, 6 February 2014

Liberal Democrat Tax Plans

Liberal Democrats are building a stronger economy and a fairer society, enabling everyone to get on in life.

Under Nick Clegg’s leadership, the party have focused on the old liberal principle of favouring taxation on unearned wealth over hard work. This has culminated in the introduction in Government of the key Lib Dem policy of cutting taxes by £700 for more than 20m people.

The manifesto has not been written yet, so any reports of what will be in it are just speculation.

However, we passed a motion on tax policy at our Autumn Conference last year in Glasgow. Our motion proposed raising the tax threshold further, to the level of full-time work on the minimum wage, a mansion tax on the value of properties over £2m, restricting pension tax relief at £1m and cracking down further on tax evasion and avoidance.

Mansion Tax

The Liberal Democrats want everyone to pay their fair share, which is why we believe a mansion tax on the value of properties over £2m is fair.

Personal allowance threshold

In Government we have achieved our manifesto pledge to increase the income tax personal allowance to £10,000, taking 2.7m people out of income tax and giving a tax cut of £700 per annum to 24m others.

As the next step, we believe that there is a clear case for taking the equivalent of a full-time job on the minimum wage (equivalent to £12,300 per annum at current rates) out of income tax entirely. This is a bold move which would provide tax relief to many millions of families on low and middle incomes, and would help to maximise the rewards of employment for those on low incomes.

Making this change in one go would come at a significant cost to the Treasury, therefore we intend to phase this change in in stages over the course of the next Parliament. It would be paid for through the other tax changes we propose to make, such as introduction of a Mansion Tax, Capital Gains Tax and pension tax reform, and our range of measures designed to tackle tax avoidance.

In this way we can provide tax cuts to those who most deserve them, encourage employment and boost the economy.

Pensions tax relief

A £1m lifetime allowance would still be a generous regime – even at the existing low annuity rates, a £1m pension pot for a typical pensioner would provide a tax-free lump sum of £250,000 on retirement plus an inflation-linked pension of around £25,000 a year (or £45,000 per year fixed).
In reality the vast majority of employees will not reach a pension pot of £1m, and therefore will be unaffected by our proposal.

Capital Gains Tax

Taxing capital gains at a lower rate than income, as per the existing system, is of little or no benefit to the least well-off members of society, but allows some of the wealthiest individuals to pay significantly less tax than if the rates were aligned. This is fundamentally unfair.

In Government, we acted quickly to make the regime more progressive by introducing a higher rate of 28% for gains made by higher and additional rate taxpayers, however ultimately we believe Capital Gains Tax rates should be aligned with income tax rates.

Our tax reforms would achieve this, and would also reintroduce indexation allowances, in order to ensure that no-one is taxed on the portion of a ‘gain’ which has arisen simply due to inflation – and therefore ensure that no-one is penalised for holding assets over the long term.

The additional revenue that would be raised by these measures would go directly towards our aim of increasing the income tax personal allowance to the level equivalent to the minimum wage, which would benefit all individuals in full time employment – instead of the preferential Capital Gains Tax rates which only benefit the wealthy.