Tory MPs favour income tax cut over reducing IHT in next Budget

Tory MPs favour a cut in income tax over reducing inheritance tax in the next Budget, The Telegraph has been told.

Speaking in Davos this week, Jeremy Hunt signalled he would deliver a tax-cutting fiscal statement in March.

The Chancellor is understood to be weighing up whether to abolish inheritance tax, or adjust income tax which could see the level at which the basic rate is levied increased or the 40p threshold raised.

Mr Hunt is also considering a further cut to departmental spending plans to fund the tax cuts, The Telegraph can reveal.

It comes amid Treasury considerations over holding a second Budget before the next election, if the ballot is scheduled for autumn.

Some 24 of 30 Tory backbenchers contacted by The Telegraph said income tax cuts should be a priority, while four favoured inheritance tax and the rest declined to state a preference.

Income tax cuts would benefit many more people, with 29 million adults paying the 20 per cent basic rate and 6.6 million people paying the 40 per cent additional rate, according to official figures.

An income tax cut would also have a more immediate impact on people’s finances than an inheritance tax cut, which could help the Tories argue that they are rewarding work in the run-up to a general election.

However, inheritance tax is deeply unpopular with the public, according to polls, and The Daily Telegraph has long campaigned for its abolition.

Labour insiders have admitted the party would be less likely to match a Tory promise to abolish inheritance tax, setting up a dividing line between the party and the Opposition.

Earlier this week, Rachel Reeves, the shadow chancellor, hinted at tax cuts for top earners.

Speaking in Davos, Ms Reeves said that freezing income tax thresholds in the face of rising inflation “has affected people paying the top rate of tax and the basic rate of tax, and both of those groups of people are working hard, but getting less every month in their pay packets”.

She added: “My instinct is to have lower taxes.”

When contacted by The Telegraph, politicians in both the more Right-wing New Conservatives group of Tory MPs and the more moderate One Nation group expressed a preference for cuts on income tax.

Jonathan Gullis, a member of the New Conservatives who won his Red Wall seat of Stoke-on-Trent North in 2019, said: “We need to reward hard work, and the best way to do that is by allowing people to keep more of their hard-earned money”.

Matt Warman, of the One Nation Conservatives, said the group “looks not to ideology but to the centre ground of tax cuts for the many, not the few”.

Marco Longhi, the MP for Dudley North, said: “I hate inheritance tax because people have been taxed during their lifetimes already but choices need to be made and I would much rather see a reduction in the overall taxation everybody pays rather than one that very few pay.”

Another senior Tory said he would prefer to see a cut to inheritance tax over income tax, as this would be “doable, affordable and something that Labour can’t copy”.

Inheritance tax is charged at 40 per cent on estates worth more than £325,000, or £500,000 if the estate includes a main residence that has been left to a child or grandchild.

A married couple can share this allowance, meaning that an estate worth £1 million can be passed on without beneficiaries losing money to the taxman.

This leaves only 4 per cent of households in the UK needing to pay inheritance tax each year, though it was forecast to generate £8 billion for the Treasury in 2023.

Income tax is paid by more than three in five people and will make an estimated £268 billion for the Treasury by the end of this financial year.

Speaking at the World Economic Forum on Thursday, Mr Hunt acknowledged that voters were “very angry” about high rates of tax under the Conservative government and said that he would focus on “pro-growth policies” in the coming year.

He said: “In terms of direction of travel, we look around the world and we note that the economies that are growing faster than us, North American, Asian economies tend to have lower taxes.”

Mr Hunt signalled that lower than expected interest rates could leave room for more generous tax reductions in March than was thought at the time of his Autumn Statement last year.

The Chancellor is prepared to pencil in smaller increases in departmental spending budgets until the end of the decade if a deteriorating economy limits his headroom to slash taxes, The Telegraph understands.

Under current plans, day-to-day government spending limits will rise by 0.9pc in real terms until 2028-29.

“We could chip away at that if it gives us more room to cut taxes,” said one Whitehall source.