With days to go until the Budget, Labour's interpretation of working people is under the spotlight as the party's election manifesto said that these taxpayers would be protected from tax rises.
Sir Keir Starmer has reiterated his 'absolute commitment' that income tax, national insurance and VAT will not go up for 'working people'.
When pressed about his exact definition of the term at the Commonwealth Summit in Samoa, the PM told Sky News that a working person was someone who 'goes out and earns their living, and is usually paid in a sort of monthly cheque but that is obviously very broad… what I mean is the sorts of working people that go out, work hard and maybe save a bit of money, but don't have the wherewithal to write a cheque if they or their families get into difficulties'.
Sir Keir Starmer also said that anyone owning assets would not fall under the definition, leaving the Chancellor plenty of room to raise taxes on asset-rich taxpayers, including business owners, landlords and shareholders.
Starmer made clear that anyone owning shares would not be defined as 'working people'.
Many are deeply unhappy with the PM's definition.
However, could the Chancellor, Rachel Reeves, be considering a rehash of the old Investment Income Surcharge (“IIS”) which disappeared in 1984. IIS of 15% was charged on investment income and at one point when added to the top rate of income tax of 83% meant an overall tax rate of 98%. With today's income tax rates of 40% and 45% the result might be tax on investment income at 55% or 60%.
For those working in the City taking capital returns from their 'investment' strategies the return of an IIS regime would certainly be as unwelcome as a reclassification of their capital gains as income.
But these ideas are not new, they were explored in an article of 30 April 2020, Tax After Coronavirus – www.taxresearch.org.uk/Blog/2020/04/30 . Here's a short extract:
An investment income surcharge
There is a major problem within the UK tax system as a result of the fundamentally different levels of tax paid on income from work and income from investments.
The difference results from the fact that the UK has throughout the whole post-war era had a social security system that is supposedly funded by national insurance contributions (NIC). The reality is that NIC does not fund that social security system now: NIC is now simply a tax, However, the suggestion that this is both a form of insurance and that contributions from those in employment are required as a result has persisted despite that fact. As a consequence an anomaly has been created within the UK tax system.
The article also says:
Since 1984 the bias in favour of unearned has existed.
It could easily be corrected. If those who derive their income from increases in wealth or returns from it are taxed a great deal more lightly than are those who derive all their income from work, then the reintroduction of an investment income surcharge makes a gear (sic) deal of sense.
Total investment income for those earning over £50,000 in 2016/2017 was £45 billion and if an investment income surcharge of 15% on all investment income exceeding £2,000 a year was introduced a significant step towards addressing this imbalance would be made. The yield might have exceed £4 billion, but that number is likely to be much higher.
There is a strong expectation that the Chancellor will increase employers' national insurance in the Budget, which could raise tax take by £8.5bn from a 1% increase. This tax is easy to implement fast and would hit all employers.
Meanwhile, more comment on 'working people' can be found here
www.taxresearch.org.uk/Blog/2024/10/25/what-is-a-working-person
Peter Nichols
Tax Director – BFN Accounts & Tax Limited
25/10/2024