"Unusual measures for unusual times" - Conservative tax hike passes Commons vote
A rise in national insurance rates and the increase in tax on dividends are, for a Conservative government, unusual measures for unusual times.
The prime minister was at pains to point out that the most eye-catching measure – the manifesto-busting ‘health and social care levy’ – is ultimately the right thing to do, despite some level of grumbling from the back benches.
It was also a clever move to tie the hike tightly to improvements in care and health services. As was seen in the Commons vote, it was always going to be difficult for politicians to stand up against the new measures, given the cherished status of the NHS after the experiences of the last 18 months, and the emotive issue of social care.
However, looking at the broader tax landscape there are some longer-term issues to consider.
Firstly, there was a lot of speculation earlier this year about rises to capital gains tax and income tax rates to pay for the pandemic.
Perhaps the new levy means that pressure for other rate rises will subside. It would take a brave Conservative politician indeed to raise tax rates on top of the increase in national insurance.
Ironically, tax-and-spend type fiscal policies traditionally lie on the left of the political spectrum.
With the Conservatives now occupying more and more of the centre ground, it will be interesting to see how the opposition, and Labour in particular, will differentiate themselves from the government in this area.
Secondly, it’s difficult to see how the increase in the national insurance rate can be reversed, at least in the short to medium term.
This means that the increase could start to become part of the fiscal fabric for years to come.
It’s worth remembering that the increase covers both employers’ and employees’ national insurance contributions, so the overall cost to businesses will be felt at some stage, perhaps in a squeeze on wages or an increase in consumer prices.
Given the circumstances, few may be motivated to mitigate against these proposals, and indeed opportunities to do so appear to be extremely limited. It is, however a useful reminder of the impact that government policy can have on entrepreneurs.
Regular tax planning is always important and, with further announcements expected in the autumn, now is a good time to contact your adviser.