Rishi Sunak has promised the biggest income tax cut in 30 years, vowing to slash the basic rate from 20 per cent to 16 per cent if he becomes prime minister.
In a major announcement as he battles to close the gap to frontrunner Liz Truss, the former chancellor pledged to deliver the change by the end of the next parliament.
The move would mean millions of households paying a fifth less in income tax. Someone earning the average UK salary of £32,000 would save about £777 under the plans.
Mr Sunak’s campaign argued that the move was consistent with his previous stances, given the tax cut would only be adopted once inflation drops and would not be funded by borrowing.
But a Truss campaign source dubbed the move a “flip-flop” aimed at winning votes from Tory members, after three weeks of fiercely criticising his rivals for promising major tax cuts.
Mr Sunak said: “What I’m putting to people today is a vision to deliver the biggest income tax cut since Margaret Thatcher’s government.
“It is a radical vision but it is also a realistic one and there are some core principles that I’m simply not prepared to compromise on, whatever the prize.”
But Simon Clarke, the Chief Secretary to the Treasury, who is backing Ms Truss and held his post under Mr Sunak, countered: “Liz will cut taxes in seven weeks, not seven years.”
Postal ballots in the race to replace Boris Johnson as Conservative Party leader and prime minister start being sent out on Monday, giving Tory members the chance to vote early in the race before the result is announced on Sept 5.
The campaign battle so far has been dominated by differences on economic approach between Mr Sunak and Ms Truss, the Foreign Secretary – most notably on taxation.
Mr Sunak has argued that bringing down inflation should be the priority, insisting that big tax cuts must wait. Ms Truss has vowed tax cuts this year to trigger economic growth, paid in part by more borrowing.
Now Mr Sunak, who has been consistently lagging behind Ms Truss in opinion polls of Tory members, has unveiled a promise to deliver a major personal tax cut if he wins.
While in the Treasury, the former chancellor had promised to cut the basic rate of income tax from 20 per cent to 19 per cent by 2024. The change is already government policy.
He is now promising to drop that down to 16 per cent by the end of the next parliament – the period between the next general election and the one after that.
It is the second major tax cut announced by Mr Sunak in a week, coming after he vowed to scrap VAT on household fuel bills for a year. He is also promising a major new investment tax cut this autumn, replacing the so-called “super deduction”.
The timing of the income tax cut in part depends on when the next election is held. If it takes place in May 2024, as widely expected, the next parliament could run to 2029 – although it may end sooner.
Mr Sunak hopes to drop the basic income tax rate by one percentage point each year from 2024, according to a campaign source, meaning it would fall to 16 per cent around 2027.
It costs about £6 billion for every percentage point drop in the basic income tax, meaning the extra three percentage point reduction being promised would cost £18 billion.
It would be the largest cut to income tax since the late 1980s, when Lord Lawson slashed the basic and higher rate when he was chancellor under Margaret Thatcher’s premiership.
‘I never make promises I can’t pay for’
High earners will save less proportionally than low earners from the change, given that some of their income falls into the higher income tax rate of 40 per cent – which Mr Sunak is not proposing to change.
The Sunak campaign is arguing that the cut will be funded by extra tax revenues generated by the economic growth currently forecast between 2024 and 2027 and will not involve any more borrowing.
Mr Sunak said: “Firstly, I will never get taxes down in a way that just puts inflation up. Secondly, I will never make promises I can’t pay for. And thirdly, I will always be honest about the challenges we face. Because winning this leadership contest without levelling with people about what lies ahead would not only be dishonest – it would be an act of self-sabotage that condemns our party to defeat at the next general election and consigns us to a long period in opposition.
“There is no more serious choice than the one now facing Conservative members – to decide the person who leads our country at home and abroad during difficult times. As they turn to that decision, I would urge them to treat with caution any vision that doesn’t involve any difficult trade-offs and remember that if something sounds good to be true – then it probably is.”
But Mr Clarke responded: “People are facing the biggest cost of living crisis in decades and the tax burden is at its highest level in 70 years. We cannot afford to wait to help families, they need support now.”
A Truss campaign source went further: “It’s welcome that Rishi has performed another U-turn on cutting tax. It’s only a shame he didn’t do this as chancellor, when he repeatedly raised taxes.
“Unfortunately it’s a case of ‘jam tomorrow’. People need tax cuts in seven weeks, not in seven years. He has also made it conditional on getting growth first – knowing full well that his corporation tax rises are contractionary. The public and Conservative Party members can see through these flip-flops and U-turns.”
Ms Truss has promised to cancel the planned rise in corporation tax from 19 per cent 25 per cent due in April, reverse the 1.25 per cent National Insurance increase that kicked in this spring and lift the green energy levy imposed on consumers’ bills for two years.
The Sunak campaign has argued that his tax cuts would not need more borrowing and debt would still keep falling as a percentage of GDP each year. Ms Truss has said “fiscal headroom” would cover some of the £30 billion cost of her tax cuts, but argued the Covid-19 debt should be reduced over a longer period than Mr Sunak is proposing.
