Households are facing a £44.6billion stealth tax hit, meaning they will be worse off even after Jeremy Hunt’s National Insurance cut, according to the budget watchdog.
Despite the measures the Chancellor announced the overall tax burden is still on course to rise to 37.7 per cent of national income – the most since the Second World War.
The sum taken by the Treasury as a result of frozen tax thresholds will dwarf the £10billion cost of cutting the main rate of National Insurance by 2p in the pound, the Office for Budget Responsibility said. It said the stealth tax hit was equivalent to the National Insurance rate going up by 10p.
Despite the measures the Chancellor announced, the overall tax burden is still on course to rise to 37.7 per cent of national income – the most since the Second World War
That prompted a claim that Chancellor Jeremy Hunt was ‘giving with one hand’ while taking away with the other.
Torsten Bell of the Resolution Foundation think-tank said: ‘The truth is taxes are up not down. Today’s cuts are dwarfed by tax rises already under way. By the end of this decade taxes are set to be up by the equivalent of £4,300 per household compared to 2019.’
Paul Johnson of the Institute for Fiscal Studies said the cuts to business tax and national insurance ‘won’t be enough to prevent this from being the biggest tax raising parliament in modern times’.
Thresholds for paying tax have traditionally gone up in line with inflation, but they have been frozen from 2021 until 2028.
It means that growing numbers of middle earners are paying higher rates – traditionally intended to catch only the wealthiest – even if their pay has been rising only in line with the cost of living.
As high inflation has persisted, the impact of this so-called ‘fiscal drag’ has grown. By 2027/28 it will be £13.6billion higher than expected at the time of the budget in March.
It is also described as a stealth tax because it garners huge sums for the Treasury without the Chancellor having to make any big tax-raising announcements.
The current thresholds mean that incomes over £12,570 are subject to basic rate income tax at 20 per cent while earnings over £50,270 pay a 40 per cent rate and the additional rate, on incomes over £125,140, is 45 per cent.
The OBR calculated that nearly four million more people would be expected to pay income tax by 2028/29 compared with 2022/23 as a result of the freeze, with three million moving to the higher rate and 400,000 dragged into paying the additional rate.
Overall, income tax receipts are expected to surge from £250.2billion in the 2022/23 tax year to £363.5billion in 2028/29, the watchdog said. The £44.6billion a year to be grabbed in stealth taxes in 2028/29 alone represents two thirds of the cost of the Covid-era furlough scheme subsidising wages for laid-off workers.
Tom Josephs, a member of the OBR’s budget responsibility committee, said: ‘Fiscal drag is a powerful driver of increased tax receipts and is stronger than we were previously forecasting.
‘The National Insurance contributions the Chancellor has announced in this statement reduce the tax take by around £10billion by the end of the forecast so roughly they are offsetting a quarter of the increases in personal taxes that result from fiscal drag.’
Tom Stevenson of Fidelity International investments said: ‘With the freeze on income tax thresholds in place until 2028, the Government is giving with one hand but for some, the benefit could soon be reduced by a move into a higher tax band. Fiscal drag is alive and well.’
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