Charlotte Kennedy, Chartered Financial Planner at Rathbones, examines what Andy Burnham’s decision to scrap VAT on domestic electricity bills could mean for taxpayers and argues the bigger question is how the government’s wider economic agenda will ultimately be funded.
“Andy Burnham has started his premiership with a carrot: scrapping VAT on domestic electricity bills from October. But the saving will vary from household to household, depending on factors including energy use, tariffs, property type, energy efficiency and household size.
“The government estimates the measure will cost £850 million this financial year, funded by savings from scrapping the digital ID programme. But the bigger question is what will ultimately fund the new government’s “new economic model”.
“Burnham has inherited a difficult economic backdrop: subdued growth, stubbornly high borrowing, a sizeable national debt and rising debt-servicing costs, alongside unresolved questions over how to fund higher defence spending. The arithmetic leaves limited room for manoeuvre. Higher taxes, spending cuts, more borrowing – or some combination of the three – could all be on the table.
“That matters because the UK already has a highly progressive income tax system, with a relatively small group of higher earners shouldering a disproportionate share of the burden. Our analysis shows that someone earning £150,000 earns 3.8 times the median full-time salary yet pays more than 10 times as much in income tax.”
“Frozen tax thresholds have also steadily pushed more people into higher tax bands without a corresponding improvement in their standard of living. This is particularly relevant for HENRYs – high earners, not rich yet – who may look affluent on paper but are often juggling hefty mortgages, childcare costs, pension contributions and other financial commitments.
“So, while the government may want to pursue a different economic strategy, the question is how much more pressure can be placed on the same relatively narrow group of taxpayers. The key issue is not simply whether taxes will rise, but who will ultimately be expected to pay for Burnham’s economic agenda – and whether those already carrying a disproportionate share of the burden have much more capacity left.”
