©AFP

The Chancellor may restrict some tax reliefs, delay the uprating of tax thresholds and look afresh at smaller taxes to raise revenue, following the government’s plans for a five-year ban on increases in the three main taxes.

Unusually, the tax freeze will be enshrined in law, tying the government’s hands in relation to income tax, value added tax and national insurance contributions under what the Conservatives call the “tax lock commitment”.

Alex Henderson, tax partner at PwC, the professional services group said the ‘lock’ would put the spotlight on other potential sources of tax revenue. He said: “Arguably the lock means the Government has less flexibility on where tax revenues could come from, with the burden more thinly spread.”

But in addition, he said there would be “plenty of scope” to raise revenues from the taxes covered by the lock by delaying the uprating of thresholds and removing reliefs.

The government has ruled out extending the scope of VAT to items such as food, children’s clothes, books, newspapers and public transport fares. The cost of these exemptions was £39bn in 2014-15.

But the Treasury could increase the tax base for income tax or national insurance by reining in reliefs. During the election campaign, the Conservatives announced plans to restrict pension tax relief to pay for inheritance tax cuts. Mr Henderson said it might also look at items such as interest deductibility for buy-to-let housing and the national insurance contribution exemption for employers’ payments to pension plans.

Tax experts warned that the Treasury had restricted its room for manoeuvre by promising there would be “no rises in income tax rates, VAT rates or national insurance contribution rates for individuals, employees and employers”.

This catch-all definition leaves almost no scope for changing the structure of the three biggest taxes to bring more money into the exchequer; for example, by aligning the national insurance paid by the self-employed with the higher rates paid by employees.

Simon Walker, director-general of the Institute of Directors said: “While IoD members are opposed to increases in the rates of VAT, income tax and national insurance, we consider it imperative that the Government’s commitments do not prevent bold tax reforms to both simplify taxation and reduce the burden upon businesses and individuals.”

Paul Johnson, director of the independent Institute for Fiscal Studies, said the fiscal commitments appeared to rule out sensible plans for tax reforms, such as the treatment of national insurance for the self employed.

He said it was “extreme to tie your hands for such a long period with the main rates of the three largest taxes”. But he added that the bill was unlikely to bite as no British government had raised the main rate of income tax since 1973 and further rises in VAT rates above 20 per cent were unlikely. He added that the NICs commitment was valuable as it had been repeatedly raised by governments of both parties as a disguised income tax.

Cameron pledges to ban tax rises until 2020

Policy ties hands of chancellor following Tories’ win.

More attention is now likely to be paid to the other big revenue raisers: council tax, business rates, fuel duty and corporation tax. Increasing fuel duties by 10 per cent — adding 7p to the price of a litre of petrol — would, for example, raise £2.6bn per year, but the tax is politically sensitive and the coalition government has made cuts to it in real terms. Increasing corporation tax 1 percentage point would raise £1.5bn a year but would be at odds with the government’s policy of having the most competitive tax rate in Europe.

The Treasury could also consider reforms of capital gains tax, inheritance tax and council tax for the most expensive properties. Exemptions that could be targeted include inheritance tax and business rates reliefs for agricultural property; capital gains tax relief for owner-managed businesses and for assets bequeathed at death; reduced business rates for low-value properties; and a council tax discount for sole occupants.

Although tax experts said the Chancellor could raise significant sums by delaying increases in the thresholds of most taxes, the government pledged to increase the main income tax allowance in line with rises in the national minimum wage, ensuring that those working up to 30 hours a week on the minimum wage do not pay income tax.

The Conservative government also committed itself to keeping the national insurance upper earning limit — the point at which the main employee rate falls from 12 per cent to 2 per cent — no higher than the threshold for paying the higher 40 per cent income tax, currently for those with an income from £42,385.

Some additional savings will come from the proposed Full Employment and Welfare Benefits bill, which confirmed the government’s aim to lower the cap on benefits payments from £26,000 to £23,000 per family and freeze the main rates of working age benefits for two years from 2016-17. The IFS has calculated these measures are likely to contribute only £1.5bn a year towards a pre-election pledge to reduce welfare spending annually by £12bn.