Don’t be fooled: Osborne isn’t cutting taxes, he’s raising them

The public finances are still in lousy shape, says Merryn Somerset Webb. That means George Osborne has ended up being a tax raiser, not a tax cutter.


George Osborne: tax raiser, not tax cutter

When is a tax not a tax? George Osborne has some answers to this question.

It could be when it is a hypothecated levy' a charge to be paid out of taxpayers' income to fund some wheeze the chancellor assumes we all think is particularly worthy. So in this week's Autumn Statement, we got the apprenticeship levy, a 0.5% tax on company payrolls designed to fund three million apprenticeships.

It could be when it is a duty like the three percentage points to be added to each stamp duty band for buy-to-let properties and second homes. This could also apply when it is nothing to do with Westminster councils getting the right to raise council taxes to cover their social care bills.

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Or it could just be a delay: the government coffers will benefit to the tune of £840m from the delay to automatic enrolment (all the money that would have gone untaxed into pensions stays taxed a little longer).

Finally, it could be when it is a freeze though these tend not to be mentioned out loud at the dispatch box. The annual Isa allowance is frozen at £15,240 and the Junior Isa allowance at £4,080. Those with student loans have been hit too. The earnings threshold for repayments has been frozen at £21,000 for five years (rather than rising with inflation) and applied retrospectively to those who started their degrees in 2012.

That, says the Institute for Fiscal Studies, will cost students on average an extra £6,000. Freeze or tax rise? Mr Osborne would say freeze. But the truth is that unless the UK really does stay stuck in deflation (unlikely even Japan has mostly low inflation rather than deflation) every freeze is effectively a tax rise. And, given the mess the public finances are in, it is no wonder Osborne likes those: overall he has just given us some £28bn worth of tax increases over the next five years.

The problem here is simple: it doesn't matter what you call it, tax fiddling has consequences. Osborne is skilled in presenting taxes as part of feel-good stories. Selfish companies are made to pay for socially useful apprenticeships. Rich buy-to-let investors have to pay for poor first-time buyers. The outrageous EU-driven tampon tax is diverted to women's health charities.

But there is no such thing as an innocent tax. All taxes skew behaviour. Look to income tax receipts this October they came in short of expectations. Why? My guess is that if you look at salary sacrifice numbers for the month you will find a clue to part of the answer.

From April, the tax-free pension allowance for those earning over £150,000 will fall (to £10,000 for those earning over £210,000). Around 235,000 people earn that much, and those people contribute nearly 30% of the UK's income tax revenues. Let's assume 150,000 of them want to add cash to their pensions in advance of the relief cuts. What do you think these people are doing right now? I'll tell you.

They have all called their accounts departments and asked to raise their salary sacrifice amounts so that they use the full £40,000 they are allowed in this part of the year, plus anything they can carry over for the past two years. Let's say that they sacrificed £15,000 of salary each in October. That's £7,050 that each of them has not paid in income tax and National Insurance. A total of £105m over just one month. See what I mean?

Cutting tax relief for high earners seems like a really good idea in the long term. But it costs a small fortune in the short term. The tax rise on buy-to-let will change behaviour too. If you buy a house for investment purposes today for £200,000, the stamp duty will cost you £1,500. Buy at the same price in May next year and it will cost you £7,500 (3% on £125,000, and 5% on the rest). You will say that is only another £6,000 on the purchase price. But that is missing the point. It is another £6,000 in cash upfront on the purchase price. That's different.

Let's say you have £81,500 to invest. You buy a house for £200,000 (most buy-to-let lenders want a 40% deposit) and use £1,500 to pay the stamp duty. Now let's move forward a year. You still have £81,500 to spend. But you can't buy a £200,000 house.

Subtract the inflated £7,500 stamp duty bill from your cash pile, and you have only £74,000 left. That's only enough of a deposit to secure a loan to buy a £185,000 house. Whoops.

An equilibrium will be found here, but you get the point given that most buy-to-let purchases involve borrowed money, the rise in stamp duty should bring their price down by more than 3%.

Help to Buy has consequences too. There are endless signs that the central London property bubble is topping out. But the government intends to offer 135,000 buyers (with a household income of up to £90,000) the right to a 40% interest-free loan towards buying a new-build house in the capital. This will act to shovel more demand into a market that looks like it is (finally) beginning to slow, pushing up prices that should really be allowed to fall.

And what about when prices do fall? Does the taxpayer have a moral responsibility to bail out the hapless buyers it helped in at the top? Will Help to Buy turn into Help to Sell?

The student loan threshold freeze makes a difference as well. The more you have to pay on a loan (that you are unlikely to ever pay off in its entirety) the less the disposable income you have available to spend on a happy life and just maybe a house deposit that doesn't involve other taxpayers.

Perhaps if student loans were cheaper, there'd be no call for these absurd Help to Buy schemes in the first place.

It may seem that I am making a lot of points in this column, but I'm actually only making one simple one: the public finances are still in lousy shape. That means George Osborne has ended up being a tax raiser, not a tax cutter.

The key takeaway for investors from the Autumn Statement is therefore very simple: try not get caught investing in or relying on things that don't work with the stories he uses for cover buy-to-let being the obvious example this week.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.