Rishi Sunak should cut national insurance and make investment relief permanent, report argues

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt should cut companies’ national insurance contributions and make the temporary business investment tax relief permanent, an influential think tank has argued in a radical blueprint to overhaul the UK’s tax regime.

Employers’ should be subjected to a 12.8 per cent national insurance levy, one percentage point lower than the present rate, according to a report out today from the Resolution Foundation.

Reducing reliance on generating tax revenues from earnings would stimulate employment and help the UK reverse its more than decade-long stagnant economic growth, the think tank has claimed.

Making the current 100 per cent investment tax relief permanent would incentivise businesses to ramp up capital spending and create more opportunities for GDP growth to flourish, the report argues.

Britain’s tax burden – tax revenues as a share of output – is on track to hit 38 per cent in five years, its highest levels since just after the second world war, up from an average of 33 per cent over the past two decades or so.

That will amount to a near £4,200 tax increase per household.

As a result, policymakers need to focus on delivering a more effective tax regime to justify the Treasury grabbing a greater share of voters’ incomes.

“This rising quantity of tax revenue has not been matched by a rising quality of tax policy,” Adam Corlett, principal economist at the Resolution Foundation, said.

“Britain’s tax system needs a complete overhaul so that it is focused on helping rather than hindering economic growth, reducing inequality and creating a level playing field,” he added.

Politicians must stop chopping and changing tax policy or risk choking business growth, innovation and employment, the report said. 

Last year, former PM Liz Truss launched the biggest tax cutting budget since 1972, only for nearly all her measures to be ditched by now Chancellor Jeremy Hunt a month or so later after the package wobbled financial markets.

In 2021, Boris Johnson and Sunak raised national insurance rates 1.25 percentage points. The move was canned by Truss upon entry to Number 10.

“U-turns and fiscal fudging have been too common, and reform side-lined too often,” the Resolution Foundation said, adding that MPs have decided to “pretend a major tax-cutting era is just around the corner” instead of focusing on “improving the economic efficiency, equity and predictability of the tax system”.

Sunak and Hunt are tipped to offer up tax cuts in the run up to the next election – which must be held by January 2025 – to win over voters.

Other measures the Resolution Foundation tabled include:

• Hiking the basic rate of dividend tax to 20 per cent from 8.75 per cent
• Raising capital gains tax rates, but exempting gains that are line with inflation
• Increasing taxes on rental income and self-employment tax rates
• Scrapping the reduction to the level at which stamp duty is paid – an effective tax rise

The end result of the package would be to equalise marginal tax rates on incomes generated from employment, self-employment, dividends, real capital gains and rental income, which the Resolution Foundation argues would make the tax system fairer and more efficient.

A treasury spokesperson said: “We borrowed hundreds of billions of pounds to support UK households and businesses through an unprecedented pandemic and rising energy costs from Putin’s war, and it is right that we keep the tax system adaptable so it can move fast to restore public finances fairly.”