David Cameron pledges Income Tax cuts

Here at Tamebay Dan and I often have interesting political discussions, amazingly we often agree on policy but just disagree on which party is best placed to bring it to fruition.

The latest such topic is taxation, David Cameron just announced at the Tory party conference that if the electorate deliver a Conservative government and if the budget deficit is eliminated (currently estimated to occur in 2018) and if the government can then find further cuts in public spending (a lot of ifs), then personal income taxes will be slashed.

Cameron is promising a double tax cut by raising the 40p threshold from £41,900 to £50,000 and raising the personal income tax allowance from £10,500 to £12,500. He says that the 40p tax was intended only to apply to the most well off earners and too many ordinary workers such as the police and teachers are now paying the higher rate tax. Plus of course raising the personal income tax allowance benefits lower paid workers.

Is this the right thing to do though? What about other taxation, for instance VAT. Would we be better off by slashing VAT than slashing income tax? Dan and I are both in favour of VAT reductions.

VAT is a tax on consumer spending. Every time a business that’s VAT registered makes a sale the government takes an immediate 20% slice of the action. Unlike income tax (which for a self employed person is paid on profits) VAT is paid on turnover with no regard to the profit (or loss!) made on the deal.

There are two things the government could do to encourage small businesses to grow. One is lowering the headline rate of VAT, the second is either a significant raising the threshold at which businesses have to register to pay VAT, or a stepped introduction to VAT similar to personal tax allowances.

We hear of so many small businesses who purposefully trade just below the VAT threshold holding back growth. Currently if you operate on a 30% margin and turn over £80,000 you pay no VAT and your profit is £24k. If you turn over £81,000 operating on the same 30% margin you lose 20% VAT and your profits plummet to £10.8k.

Of course, the government would argue that you should simply add VAT to your prices, but the reality is that would make you uncompetitive. Equally you won’t lose a full 20% as you can claim back your input VAT. What’s certain however is that you’ll make a lot less profit than before you went VAT registered.

What tax cuts would you welcome? Does a cut in income tax (either raising the 40% threshold and/or raising the tax free allowance do it for you), would you prefer to see a cut in VAT, or is there another tax cut that would benefit your business even more?