Sir Ed Davey has promised £17 billion a year in income-tax cuts funded by economic growth the Liberal Democrats believe would follow Britain rejoining the European Union’s Single Market and entering a new customs union.
The Liberal Democrat leader used his keynote conference speech in Brighton to propose raising the tax-free personal allowance from £12,570 to £15,000 and increasing the threshold at which the 40 per cent higher rate begins from £50,270 to £56,000.
The party says approximately 2.5 million people would be removed from income tax altogether, while around 760,000 would no longer pay the higher rate.
However, the changes would not take effect immediately. The full package is intended for the final year of the next Parliament and could therefore be delayed until 2034, depending upon when the next general election takes place.
Tax cuts linked directly to EU policy
Sir Ed said the tax reductions would be paid for through what he called the “dividends of growth”, rather than additional borrowing, spending cuts or tax rises elsewhere.
The Liberal Democrats argue that rejoining the Single Market and forming a customs union with the EU would remove trade barriers, increase investment and generate additional tax receipts for the Treasury.
The party reportedly estimates that its closer-Europe programme could eventually provide an economic and fiscal boost worth approximately £27 billion. It proposes using £17 billion of that projected benefit to finance the income-tax package.
This means the funding is dependent on two major assumptions: that a future Liberal Democrat government could negotiate the proposed arrangements with Brussels, and that the agreement would produce the level of growth and additional revenue forecast by the party.
The £17 billion should therefore be described as a Liberal Democrat projection rather than money which is already available or guaranteed.
Personal allowance would rise to £15,000
Under the plan, the amount a person could earn before paying income tax would rise by £2,430, from the present £12,570 allowance to £15,000.
The higher-rate threshold would rise to £56,000. It currently begins at £50,270 in England, Wales and Northern Ireland, meaning the proposed change would remove some middle-income earners from the 40 per cent band.
There would also be a smaller increase in the threshold for the 45 per cent additional rate, which is presently charged on taxable income above £125,140.
Before the final-year cuts, the Liberal Democrats say tax thresholds would be increased in line with inflation. That would prevent further fiscal drag but would not provide the full reductions promised in Sir Ed’s conference speech straight away.
Davey positions Lib Dems as tax-cutting party
Sir Ed presented the proposals as part of an attempt to establish the Liberal Democrats as the party of lower taxes and closer European economic integration.
He contrasted his approach with Reform UK proposals to fund tax reductions through cuts to welfare spending, arguing that stronger economic growth could allow taxes to fall without reducing support for vulnerable people.
The announcement follows the party’s demand for an immediate reduction in fuel duty, lower public-transport fares and cheaper electric-vehicle charging as households continue to face cost-of-living pressures.
Sir Ed said the Liberal Democrats were in the “fight of our lives” against Reform UK and argued that reconnecting Britain with European markets offered a route to higher growth and improved living standards.
Major departure from Labour policy
The proposal creates a clear dividing line with the Labour Government. Prime Minister Andy Burnham is pursuing closer agreements with Brussels but remains committed to Labour’s current red lines against rejoining the Single Market or customs union during this Parliament.
The Liberal Democrats have already called for immediate negotiations on Single Market membership and a new customs union as part of a wider Growth and Defence Partnership with Europe.
Critics are likely to challenge both the political feasibility of negotiating that agreement and the reliability of attributing a precise amount of future revenue to it. Even if negotiations succeeded, the resulting economic gains would depend upon the terms agreed, how quickly they were implemented and the wider performance of the economy.
The tax package is therefore a long-term election commitment rather than an immediate change to anyone’s tax bill. Its eventual delivery would depend upon the Liberal Democrats entering government, securing a major deal with the EU and achieving the growth on which their funding calculation is based.