Lib Dems pledge more tax cuts: after personal allowance raised to £12.5k will also increase National Insurance threshold

Danny Alexander by Paul WalterToday’s big announcement from the Lib Dems has been the “plan to cut your tax bill further”. Here’s how The Guardian reports it:

The Liberal Democrats are to burnish their credentials as the tax-cutting party for the low paid by floating the possibility of cutting national insurance contributions for anyone earning below £12,500 a year.

In a challenge to David Cameron, who is facing pressure from Tory MPs to pledge bold tax cuts as the economy grows, the Lib Dems will promise in their general election manifesto to raise the level at which workers start to pay national insurance contributions.

Employees currently start paying national insurance on earnings above £153 a week, or £7,956 a year, at a rate of 12%. The Lib Dems say they hope to raise this to £12,500 by the end of the next parliament – bringing employee national insurance contributions into line with income tax.

The Lib Dems, who will beat the goal set out in their 2010 manifesto to raise the personal income tax allowance to £10,000 in this parliament, have already indicated that they will pledge to raise it to £12,500 by 2020. This means that no income tax would be paid on earnings below this level.

But Danny Alexander, the chief secretary to the Treasury, has gone a step further and said that the Lib Dems will work towards ensuring that no employee national insurance contributions are paid below this level. The Institute for Fiscal Studies has estimated that aligning the income tax allowance with employee national insurance contributions would lead to tax cuts for 1.2m employees.

Alexander said: “Our tax system must be fair and help to make being in work pay. That’s why cutting income tax for working people, particularly those on low and middle incomes, is a top Liberal Democrat priority. It was on the front page of the 2010 Liberal Democrat manifesto and we have fought to keep it on the agenda at every budget. By April next year we will have delivered a tax cut to over 26 million people worth £800 a year to a typical basic-rate taxpayer and taken over 3 million out of tax altogether.

“Now we want to go even further and lift the amount of money people can earn before paying income tax to £12,500. This will take hundreds of thousands more low earners out of tax altogether and give millions of working people a further tax cut of £400. This move will also give a tax cut to over 6 million pensioners. When we’ve reached £12,500 we will seek to raise the level that people start paying employee national insurance.

“These manifesto commitments will mean nothing less than a generational shift to a fairer tax system that rewards work and helps working people. That’s the way to build a stronger economy and a fairer society and ensure that everyone has the opportunity to get on in life.”

Three quick points:

1) It’s good to hear the party talk about National Insurance, a direct tax paid by many low-paid workers (as I suggested in February 2013: Focus next on National Insurance Contributions (NICs) – NOT the income tax threshold). Raising the threshold when it’s payable should be the priority if we’re serious about helping the lowest-paid workers.

2) However, calling for tax-cuts for the low-paid is the easy bit: working out how to fund them is quite another. As Adam Corlett noted here in January, the costs of raising the personal allowance are huge. The idea we could then also take low-paid workers out of NI is utterly unrealistic. Politics is about choosing and the party has chosen a tax-cut which won’t help the lowest paid.

3) And even if we could magic the money from somewhere to pay for both tax cuts within one parliament it will almost certainly be needed for public spending. Austerity isn’t going away: only a little more than half the cuts needed to eliminate the deficit have so far been identified. As I pointed out here, it’s projected there will be “an estimated 28 per cent cut in per capita day-to-day spending on public services between 2010-11 and 2018-19”. Better to avoid savage cuts to key services than to keep on cutting taxes regardless.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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  • Stephen Harte 14th Aug '14 - 4:16pm

    is it justme on winces every time I see the word “pledge” associated with one of our ploicies. Any time we “pledge” to do something people will (rightly or wrongly) remember tuition fees. We have to explain ourselves differently.

  • David Allen 14th Aug '14 - 4:54pm

    Interesteing comment about the word “pledge”. However the Lib Dem website article uses “plan” for the £12500 tax threshold and “seek” for the NI proposals”. It is the Guardian, and also Stephen Tall, who have brought in the words “promise” and “pledge”. How could anybody stop that happening, I wonder?

  • Matthew Huntbach 14th Aug '14 - 5:15pm

    It was on the front page of the 2010 Liberal Democrat manifesto and we have fought to keep it on the agenda at every budget.

    What was on the front page of the 2010 Liberal Democrat manifesto was a shift in taxation, not a cut. So a cut in taxation on the poor funded by higher taxation on the rich, ok. But claiming that a cut in taxation which was actually paid for by cuts in government spending e.g. on university subsidy is what was promised in our manifesto is a complete untruth.

    There are reasons why tax overall needs to go up. If we disregard those reasons and put ourselves across as a party whose main image is cutting tax, regardless of consequence in terms of service level in what the state provides, that is a fundamental change in what the party is about.

  • Actually, it seems the Lib Dems will be promising to raise the NI threshold, but only “hoping” to raise it by any specific amount.

    It’s almost as if someone is deliberately setting Nick Clegg up for another “You have to read the small print” moment.

  • Richard Church 14th Aug '14 - 5:17pm

    At least half the propsed increase in the income tax threshold wil be dealt with by inflation over 5 years, maybe much more, particularly if wage inflation picks up. Raising the national insurance threshold will be much more effective in helping the low paid, and much more expensive.

  • I think one way that some funding may be found which is fair is for pensioners to be brought into paying NIS if the pensioner is poor little would be paid if wealthy why be exempt when older folk need NHS as much as we do

    I am almost 61 still think its fairer for all to have the same level of contribution

    What’s more the NIS stamp should in some way be not seen as the main element toward state pension

  • Matthew Huntbach 14th Aug '14 - 5:20pm

    If we take people out of paying tax altogether by taking them out of National Insurance, next we will start hearing the line that these people should be treated as second class, not deserving of full government services, because “they don’t pay taxes”. I think it is a necessary part of “we are all in this together” that everyone should pay something on their income, which is best done by the low level income tax we call “National Insurance”.

  • Stephen Hesketh 14th Aug '14 - 5:23pm

    That’s the way to build a stronger economy and a fairer society and ensure that everyone has the opportunity to get on in life.”

    Stephen Harte and David Allen comment on the use and misuse of ‘pledge’.

    Could I add that the majority of Lib Dems I know are sick to death of the totally insipid and aliberal ‘stronger economy and a fairer society’ and ‘ensure that everyone has the opportunity to get on in life’. They typify everything wrong with the ‘ in office but not in power’ bright light-dazed, parrot-phrased coalition liberal democrats.

    I would hate to think the person who dreamt them up might be anywhere near our 2015 election campaign. I would love to give a Liberal Democrat job seeker an opportunity to introduce the real world to some of these people.

  • Eddie Sammon 14th Aug '14 - 5:26pm

    As an interested observer I think this is good and efficient, which a lot of policies don’t seem to be.

    Secondly, there is no point in having a low tax society if regulations and sanctions are going to be high. I think economic policy needs to be balanced.

    Thirdly I think this is a blow for the social liberal wing of the party, but at some point the party will have to choose between liberalism and economic liberalism. I don’t think economic liberalism is an all encompassing ideology because it flirts with extremism and still leaves people not knowing where you stand on key issues such as defence, monetary policy and gender issues.

    I would encourage the Lib Dems to follow the approach of liberalism without adjectives, which I think this is a step towards, but plenty of cuts are going to be needed and some of our policy pledges should be reversed, rather than attacking essential public services and public sector remuneration.


  • Stephen Hesketh 14th Aug '14 - 5:28pm

    And as per my Steve Webb post, whether right or wrong, how is it that the 2015 coalition-negotiating bubble know what will be in our next manifesto? Have I drifted into some sort of US presidential procession?

  • A Junior Solicitor on £30,000 gets a tax cut. A 19 year old in full time work on the min wage will have to wait.

    If I was trying to create a “Fairer Society” I’m not sure that would make that the priority for a c.£3bn tax cut.

  • David Allen 14th Aug '14 - 6:15pm

    This is how the Conservative Coalition works. The Lib Dems loudly boast of cutting taxes on the poor. Meanwhile, the Tories quietly cut taxes on the rich, and allow the growth of avoidance loopholes for business. Government receives less money.

    Government then claims that austerity is virtuous, and uses the opportunity to run down State spending on “socialist” projects such as decent health, education and welfare services for all. This enables them to promote privatisation, help their friends in private business, get rid of universal provision, and deliver better services to those who can afford them. The Coalition partners unite in establishing the smaller State.

    There are, of course, a number of glaring logical flaws in all this. Austerity was supposed to reduce the deficit, but cutting tax receipts acts to increase it! The explanation is that Osborne never really much cared about the deficit. The national economy can cope with it. “Austerity” is a smokescreen for a policy which, in truth, is designed to cut benefits and help the rich.

    The second logical flaw is about privatisation. It is promoted as a necessary means of saving money. Yet the motivation for doing it is to help the Tories’ supporters and donors in business make more money. So it will in fact cost us money. The Tories don’t care.

    But the worst flaw is the one which should concern the Liberal Democrats. We are boasting about how we want to help the poor and reduce social inequality – and yet we are working as part of a Coalition whose real overall aims are to do the opposite. We are part of the smokescreen.

    People know this. That’s why they don’t see the “pledge” issue as simply a piece of past history over tuition fees. Instead, they think it is indicative of a party which is still addicted to dishonest political positioning. They are right. And until we replace our leadership and bring back our traditional principles, they will continue to be right.

  • “And as per my Steve Webb post, whether right or wrong, how is it that the 2015 coalition-negotiating bubble know what will be in our next manifesto?”

    Because they’re writing it, presumably.

  • Tony Dawson 14th Aug '14 - 7:57pm

    Two things.

    (a) who (full names of each individual who had a vote in it) has decided that this particular proposal will be in our manifesto?

    (b) who (full names of each individual) thought that this proposal would endear itself to our national electorate by having Danny Alexander announce it?

  • Wouldn’t worry the Conservatives will get the credit, we are now just an outliner, an adjunct to the system. As a friend of mine said the Liberal Democrats are dead for the immediate future, but do not know how to lie down!!!
    I agree with Mrs Gove, what on earth is the Deputy prime Minister doing abroad when the Prime Minister is allegedly on holiday, it makes a farce of the Deputy role. Fancy the boss going off on leave and his deputy going off as well. He would be sacked.

  • Stephen Hesketh 14th Aug '14 - 8:30pm

    @theakes 14th Aug ’14 – 8:02pm “He would be sacked.”

    Surely a typo?

    @jedibeeftrix 14th Aug ’14 – 7:44pm “More generally – surely the courageous move would be to accept the logical conclusion of this suggestion by merging PAYE with NICS, at put the tax free threshold at a level that is affordable and close to the what we deem the minimum wage to be?”

    Worried I am, find myself agreeing with Jedi once again I do.

  • Stephen Hesketh 14th Aug '14 - 8:42pm

    @Chris 14th Aug ’14 – 6:26pm
    [“And as per my Steve Webb post, whether right or wrong, how is it that the 2015 coalition-negotiating bubble know what will be in our next manifesto?”] “Because they’re writing it, presumably.”

    So you are suggesting that I have indeed stumbled into some sort of US presidential procession? Where money and power speak louder than people, participation and democracy itself?
    Hmmm – at least we will get to make strange wopping noises each time we see someone from inside the bubble.

  • Little Jackie Paper 14th Aug '14 - 9:21pm

    From the Guardian quote above. ‘This move will also give a tax cut to over 6 million pensioners.’

    That sounds like a very high number, or am I missing something?

    More generally, as someone else points out above, it is not totally clear to me why pensioners do not pay NI. Of course one way of helping to fund these tax cuts would be to start to ask why it is that pensioners are a protected species when it comes to fiscal consolidation. In a few months time we will borrow about two billion to send cheques to every pensioner in the country to be used on fuel or a nice bottle of wine or down the bookies. Hertfordshire Council look likely to eviscerate the local bus service, yet the bus pass is handed out no questions asked. My Dad who owns two cars got his last year. My low-paid sister’s bus fares have risen sharply.

    It’s not, of course, going to be popular, but in a fiscal consolidation it is things like NI and pensioners that need to be given some serious consideration.

  • Little Jackie Paper 14th Aug '14 - 9:40pm

    jedibeeftrix – The tax threshold has been raised affecting people earning above the extant threshold and those people may or may not be poor. For example they might have a low income but also £400k of bubble priced house. For London boomers that’s entirely plausible.

    I’d certainly agree that it is better to tax people whilst in work than have a labyrinth of a system. But then I simply do not see someone sitting on very substantial assets as poor.

  • I am agreeing with Jedi – have I been taken by the lure of the dark side?

    @LJP: Pensioners vote – no further answers needed.

  • @Stephen Hesketh: I believe you mean a “Stronger Society and fairer economy”, right?

  • Stephen Hesketh 15th Aug '14 - 8:17am

    @jedibeeftrix14th Aug ’14 – 9:03pm
    “i am getting intensely curious about all the yoda references around here…”

    Call yourself Jedi you do … but clearly you have never met or spoken to me 🙂

    @Liberal Al14th Aug ’14 – 10:42pm
    “@Stephen Hesketh: I believe you mean a “Stronger Society and fairer economy”, right?

    No, I mean that if we had a fairer economy we would have a stronger society.

    The gap in levels of wealth and power between the richest and the rest of society fuels (and preserves) the majority of unequal life outcomes from infant mortality, through educational acheivements, remuneration, health, housing, pensions and life expectancy.

    These issues will never be tackled by petty efforts such as those to ‘ensure that everyone has the opportunity to get on in life’. Hence Fairer economy, stronger society.

  • Andrew Noblet 15th Aug '14 - 12:00pm

    How about starting all ‘promises’ in the manifesto with : ‘we will give active consideration to…’ Then if in government we can explain why something can or cannot be implemented. E.g. We can’t afford because the last lot spent all the money or we can’t increase the tax burden to pay for it etc. Sarkozy left the French economy in a mess and Hollande has been struggling to cope. At least he doesn’t mention Sarkozy in the same of our lot have a go at Labour as the sole explanation for our economic ills .

  • John Ramsbottom 15th Aug '14 - 2:58pm

    At which conference was this policy adopted?

  • jedibeeftrix 15th Aug '14 - 5:23pm

    @ SH – “Call yourself Jedi you do … but clearly you have never met or spoken to me :-)”

    Oh yeah, i’m quite oblivious to the reference these days. 😀

  • Richard Dean 15th Aug '14 - 5:35pm

    Shouldn’t that be “to the references I these days quite oblivious am”?

  • @Stephen, I was just joking because Stephen Tall got the line the wrong way around the other day. That being said, it is a rather trite line at best.

  • Peter Davies 16th Aug '14 - 2:35pm

    If your father does not apply for a bus pass then it costs the government nothing.
    If they apply and don’t use it it costs the government a small admin charge (bus companies get paid on usage).
    If we means tested every pensioner to see whether they needed it, it would cost a small fortune.

  • Stephen Hesketh 16th Aug '14 - 9:34pm

    @jedibeeftrix 16th Aug ’14 – 1:58pm
    “Indeed richard, i really need to get into character.”

    Steady on Jedi … I might have agreed with a couple of your posts but for now you remain our thought-provoking ‘friend from the dark side’ 🙂

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