Jeff Salway: 'Labour's jobs tax' is still on the way despite Tory promises

THE flak directed at the UK government for its capital gains tax (CGT) hike makes you wonder what would have happened if it had gone back on its pledge to "block Labour's jobs tax".

But what's that tucked away in the Queen's Speech? Why, it looks like the UK government is indeed backtracking on the "scrap the jobs tax" pledge that dominated its election campaign.

The repeal of Labour's plans to hike national insurance contributions (NICs) for both employers and employees were a key part of the Conservative election campaign. In the week before the election, David Cameron said that, if voted into Downing Street, his first move would be to "stop Labour's jobs tax".

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He added: "The craziest thing we could do right now is put up NICs and make it more expensive to employ people."

However, the coalition government is effectively proposing the same increases. The main rate of employee NIC will rise in April 2011 by 1 per cent to 12 per cent, and the increase in employers' NIC will also go up, by 1 per cent to 13.8 per cent, as planned by the previous government. The additional rate for high earners will double to 2 per cent.

The increase will be offset by a rise in the threshold at which employers start paying NICs on earnings by 21 a week, reducing some of the effect of the rise.

Under the likely threshold change, employers will pay more NICs on salaries over 20,000 but less in NICs on those below. For example, companies will be paying 1,300 more for employees on 150,000 a year and nearly 300 more for those on 50,000 a year, some 150 less than the hike under the original proposals.

In his defence, Chancellor George Osborne explained this when he first set out the Tory NIC stance in March. The increase in the thresholds was also the explanation in the Queen's Speech as to how the jobs tax was apparently being stopped.

But the policy took on a life of its own, leaving many individuals and businesses under the impression that the NICs increase would not go ahead. Speaking to tax firms last week, it became clear that not all tax experts realised there would still be some increase in NICs for employers.

Of course, one man's repeal is another man's improvement and their definitions of backtracking may similarly conflict. My guess – and this is supported by most enquiries made in recent days – is that many firms are still under the impression that the entire increase has been scrapped, as the government claims.

However, the threshold changes merely reduce the impact of Labour's planned rise. Taken on their own, they mean a significant increase in tax for employers, and businesses employing high earners will in particular be worse off. Taken with other pressures on businesses, higher NICs for staff earning more than 20,000 add to the uncertainty over employment decisions.

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More than one business adviser has told me that their clients are reviewing their hiring expectations over the coming months and that further cutbacks are possible. The Tories claimed in their election campaign that higher NICs would cost jobs and threaten the recovery. Does a smaller increase pose an exponentially smaller threat? Probably not, and that's before the prospect of higher VAT is factored into the equation.

This has all been overshadowed by the proposed CGT hike. It seems almost certain that some compromises will be introduced as part of the change, perhaps including a return to the taper relief and indexation that was available on CGT prior to the change to the flat rate in 2008. That it was changed just two years ago is a reminder that those who bought their assets prior to then did so in the expectation of a CGT hit in line with their income tax rate.

For long-term savers and investors, taper relief and indexation would need to be part of the package if it is not to discourage long-term saving.

More important in that respect – and more relevant for the vast majority of people than the rate of CGT – is retaining the annual allowance of 10,100.

In some quarters CGT has been painted, wrongly, as a tax on second homes, but the impact of a reduced allowance would hit millions of normal savers where it hurts.

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