Chancellor Jeremy Hunt has been urged by Conservative colleagues not to put “politics ahead of economics” as he considers last-minute plans to scrap or scale back Britain’s “non-dom” tax rules.
Hunt and Prime Minister Rishi Sunak will on Friday nail down final decisions for the March 6 Budget, with a priority being placed on finding cash to fund pre-election national insurance or income tax cuts.
But government insiders revealed that the latest forecasts by the Office for Budget Responsibility have left Hunt with £2bn less than he expected, piling pressure on him to activate emergency revenue-raising measures.
The Financial Times revealed on Thursday that one option being considered would be for Hunt to copy a flagship Labour policy and scrap or reduce tax benefits under the colonial-era non-domiciled regime.
Hunt’s allies declined to comment on a Bloomberg report that the chancellor was considering stealing another Labour policy by extending a windfall levy on the oil and gas sector.
The idea of axing the current non dom regime has drawn criticism from a senior Tory MP, while others warned that it could drive wealth creators away from London. Hunt has previously warned against such a move.
Last year the Daily Telegraph reported internal Treasury analysis which it said showed that Labour’s plans to scale back the non dom regime would end up costing £350mn, because the wealthy would flee the country.
“I always think putting politics ahead of economics is a bad idea,” former cabinet minister Sir Jacob Rees-Mogg told the FT. “There’s no point in the Conservative party adopting Labour measures which are damaging and make the UK a less open economy.”
George Osborne, former Tory chancellor, has argued that adopting Labour’s policy would “take money off the table” and force the opposition party to say what other taxes it would raise to fund its policies.
It would also help to dent a Labour attack that Sunak is wedded to the non-dom rule because it benefits wealthy Tory supporters. His wife Akshata Murty previously benefited from the regime.
Downing Street declined to comment on Budget “speculation” but said: “The chancellor has talked about having a UK tax system which is internationally competitive.”
The current UK regime allows foreign domiciled nationals resident in Britain to earn money from capital abroad without paying UK tax on it for up to 15 years, provided they do not remit any income or capital gains back into the country.
There were 68,800 non-doms in the UK in the tax year ending in 2022 according to HM Revenue & Customs. Axing the scheme altogether would raise an estimated £3.6bn a year, while Labour is looking at keeping a four-year exemption which would raise about £2bn a year.
Christopher Groves, partner at law firm Withers, said: “This is a very over-simplistic debate that misses the essential point of the regime, which is how we attract new dynamic wealth creators to the UK, not how we make the pips of those who are already here squeak.”
Sophie Dworetzsky, partner at Charles Russell Speechlys, said: “Many individuals who are non-doms generate meaningful economic activity and entrepreneurial wealth in the UK, so we have concerns that these changes could shrink the UK’s private wealth sector.
“The UK is also facing a world of increased tax competitiveness, and many regimes, not least the Italian regime, are increasingly attractive to individuals deciding between the two,” she added.
Hunt has previously defended the regime. In 2022 he told the BBC: “These are foreigners who could live easily in Ireland, France, Portugal, Spain. They all have these schemes. All things being equal, I would rather they stayed here and spent their money here”.
But Hunt is facing a very tight fiscal situation as he tries to scrimp together money to fund a 2p cut in national insurance rates, matching the same £10bn a year cut he announced in his Autumn Statement.
Things became tougher for the chancellor on Wednesday when the OBR took a less optimistic view of the “growth-enhancing” potential of Hunt’s proposed Budget measures, shaving £2bn off the Treasury’s own estimates, according to people close to the process.
The tight situation has led to claims from Osborne on his Political Currency podcast that there has “been friction” between Hunt and Sunak ahead of the Budget.
Osborne pointed to the fact that Sunak has long advocated headline-grabbing cuts to income tax. In his 2022 Tory leadership bid Sunak proposed cutting the basic rate from 20p to 16p by 2029 if he wins the election.
But Hunt favours cuts to national insurance, a tax which specifically targets workers but is less understood by voters. The OBR said the 2p cut in NI rates in the Autumn Statement could raise employment by 28,000.
Government insiders denied any disagreement. “It’s complete rubbish,” said one ally of Sunak. “Osborne doesn’t talk to anyone in Number 10.”
They pointed out that Sunak fully endorsed the 2p cut in national insurance in November and that the prime minister’s advocacy of big income tax cuts in 2022 came “at a different economic time”.
Treasury insiders have accepted that income tax cuts, which would also benefit people with property income and wealthier pensioners, are more popular with voters. But NI cuts fall more neatly into Hunt’s promise of “smart tax cuts” to boost growth and work.
A 1p cut in NI employee contributions would cost about £5bn and a 1p cut in income tax would cost £7bn.
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