Millions of workers face 9p in the pound tax raid

Claim: The Growth Commission was set up by Liz Truss

Millions of workers are facing a £75 billion stealth raid, equivalent to 9p in the pound on income tax, according to an economics think tank set up by former Prime Minister Liz Truss.

This figure is significantly higher than previous estimates of the colossal tax grab. It puts Britain on course for the highest sustained level of tax revenues as a share of the economy since the Second World War.

The Growth Commission, a group of eminent UK and overseas economists, will highlight the scale of the stealth tax in its alternative Budget in mid-November, a week before Chancellor Jeremy Hunt’s official statement.

Many voters are unaware they are worse off due to the Government’s manoeuvre, because headline rates have remained the same.

The Growth Commission was set up by Truss but works independently of the ex-PM. It plans to put forward proposals to avert the ‘damaging effects’ on the economy that would be caused by ‘this very large and unanticipated rise in the income tax burden.’

The multi-billion-pound haul, which at £75 billion a year from the 2027-28 tax year would be equivalent to a 9p in the pound rise on all rates of income tax, is caused by a six-year freeze on tax allowances and thresholds.

These are normally raised each year to account for inflation and prevent a fall in people’s living standards. But the Government-imposed moratorium means millions of lower earners are being pushed into the tax system.

Millions more are being forced into higher tax bands in an effect known as ‘fiscal drag.’

Professor Douglas McWilliams, co-chairman of the commission, condemned the use of fiscal drag as a tax-raising technique, saying it amounted to subterfuge.

‘If you’re going to put people’s taxes up you should do it honestly and not use these stealth tactics like freezing thresholds,’ he said.

Hunt has poured cold water on hopes for tax cuts this autumn, arguing there is no spare cash.

But McWilliams said he should repay some of the stealth windfall which has raised vast amounts more than originally anticipated, due to rampant inflation.

‘This is income tax money that the Government didn’t expect to get because they predicted a much lower rate of inflation than it has turned out to be,’ he said. ‘And because of that they should really be looking to hand some of it back.’

McWilliams said the stealth jackpot would be partially offset by increased welfare spending and spiralling interest payments on the national debt. ‘Spending is still getting out of control and debt interest is going to be higher,’ he said.

Options for Hunt would include ending the freeze ahead of schedule or lowering tax rates. Figures from Office for National Statistics (ONS) on Friday showed that tax receipts swelled to £77.3 billion in September, £3.4 billion higher than the same time last year.

Other observers have come up with different figures for the size of the booty the freeze will produce for the Treasury, but all are huge.

Respected think-tank the Institute for Fiscal Studies (IFS) last week predicted it would raise an additional £52billion a year by 2027, but that there is no scope for tax cuts due to the state of the economy and public finances.

The freeze was introduced in the March 2021 Budget by Rishi Sunak when he was Chancellor and passed largely under the radar. It was expected to raise £8 billion a year. But Britons will see their pockets picked for many billions more, according to McWilliams, who also founded the Centre for Economics and Business Research (CEBR).

He says it could also shrink the economy by £20 billion because people will have less cash to spend and less incentive to strive for pay rises.

The Growth Commission’s estimates for the stealth take are larger than others because they are based on assumptions by the CEBR that average earnings will increase by more than predicted by official tax and spending watchdog the Office for Budget Responsibility (OBR), which on Friday released ready reckoners that showed that an additional 1 per cent increase in average earnings would add £5.9 billion to tax receipts by 2027-28. 

McWilliams said: ‘The Growth Commission’s calculation that the extra 14 percentage points of likely wage inflation would add £75 billion might even be a cautious estimate.’

The Mail on Sunday first highlighted the stealth tax in February 2022 when the CEBR predicted the taxman’s haul would be £40 billion.

The stealth tax has mushroomed due to inflation and because Hunt extended the freeze, at first intended to last until 2025-26, for two years until 2027-28.

In the current tax year, people earning up to £12,750 pay no tax. The basic rate of 20 per cent is charged on incomes from £12,571 to £50,270.

A higher rate of 40 per cent is levied on income between £50,271 and £125,140. Above that, the additional rate of 45 per cent applies. If the threshold for higher rate tax had been raised in line with inflation it would be nearly £68,000 by 2027-28.

Truss set up the Growth Commission in July.

She was forced to resign last October after an unfunded package of tax cuts she assembled with her Chancellor Kwasi Kwarteng provoked panic on the markets. The impact of the tax freeze was not mentioned at the time.

Truss has since called on Hunt to cut taxes and is believed to harbour hopes of a comeback to high office.

The Growth Commission includes trade expert Shanker Singham, along with economists from the UK, the US, Japan and Mexico.

This post first appeared on Dailymail.co.uk