Prior to the Summer Budget announcement, the rates of VAT, income tax and NICs could be amended by the existing parliament.
Legislation will be introduced to lock the existing rates of VAT, income tax and Class 1 NICs so that they cannot legally be increased for the duration of this Parliament. The effect of the new legislation will be as follows:
The standard rate can be set no higher than 20%.
The reduced rate can be set no higher than 5% and nothing can be removed from the reduced rate.
Supplies specified in Schedule 8 (zero rate supplies) cannot be removed from that Schedule.
The basic, higher and additional rates of income tax cannot be increased beyond 20%, 40% and 45%.
This will apply to earnings income in England, Wales and Northern Ireland and to UK wide savings income as expressed in Section 6(1), Income Tax Act 2007.
National Insurance Contributions (NIC)
Class 1 NIC rates payable by employers and employees under the SSCBA will not be increased.
Legislation will also be introduced to ensure the Upper Earnings Limit (UEL) for Class 1 contributions does not exceed the Higher Rate Tax threshold (HRT). The UEL is the point at which employee’s earnings no longer count toward contributory benefits and they start to pay Class 1 NICs at 2%.
The above changes will also apply to Northern Ireland.
When will this legislative “tax lock” come into effect?
For income tax and VAT, the new legislation will take effect on the date that the summer Finance Bill 2015 receives Royal Assent.
For NICs, it will take effect after Royal Assent of the National Insurance Contributions Bill.
Once the legislative “tax lock” is in place, no chancellor in this Parliament will be able to increase taxes on individuals and businesses via VAT, income tax and NICs. It will also be illegal to increase taxes by removing supplies from the zero or reduced rate.
It is questionable whether, if the chancellor wishes to increase taxes by this means, he could simply seek to repeal this “tax lock” legislation. The legislation is a clear statement of intent: i.e. to make savings rather than increase taxes.