Stealth freezes in tax and benefit thresholds will take twice as much money from UK households as they stand to gain from the government’s cuts to headline rates, the Institute for Fiscal Studies said on Thursday.
Liz Truss stood by her tax-cutting strategy at this week’s Conservative party conference, arguing that it was essential to jolt the economy into higher growth — even as she was forced to abandon her most eye-catching measure, the abolition of the 45p top rate of income tax. In tandem with the prime minister, chancellor Kwasi Kwarteng insisted that the Tories would “deliver lower taxes for you and your family”.
But the IFS analysis showed that even after Kwarteng’s reversal of his predecessor’s increase in the rate of national insurance contributions, and acceleration of the 1p cut to the basic rate of income tax, people in every part of the income distribution were set to lose more than they gained.
“Freezes far more than outweigh headline policies . . . and they are set to drag millions more into the tax system and into higher rates of tax,” said Tom Waters, senior research economist at the IFS.
“Giving with one hand and taking with the other in this way is opaque and stealthy — and when inflation is volatile, the impact can vary hugely from what the government initially intended,” he added.
A four year freeze in the tax-free personal allowance of £12,570 means the number of income tax payers will rise by 1.4mn to 35.4mn — two-thirds of adults — by 2025-26. Over the same period, a freeze in the higher-rate threshold will increase the number paying the 40p rate by 1.6mn to 7.7mn — the highest on record.
Meanwhile, the £150,000 threshold at which people start paying the top 45p rate has been frozen since it was introduced in 2010 — and by 2025-26 the number caught by it will have trebled since its inception, from 240,000 to 760,000.
These freezes will reduce households’ income by £1,250 on average by 2025-26, the IFS said. Many households will also be caught by freezes in the thresholds at which certain benefits are withdrawn. After factoring in these and other planned changes to the welfare system, households will lose £1,450 a year on average by 2025-26 — bringing in £41bn for the exchequer.
That is double the £20bn cost to the exchequer of Kwarteng’s high profile cuts to personal tax rates — although the IFS stressed that, relative to previous plans, the cuts would place big strains on the public finances.
The combined effect of the changes to headline tax rates, policy rollouts and freezes will hit the poorest households most, the IFS said. This means that Kwarteng’s tax plans remain highly regressive, even if the government does not impose further real-terms cuts to benefits in next year’s uprating.
Because some freezes are indefinite — especially those to benefits values — the impact grows over time, with the tenth highest income households seeing a 1.3 per cent fall in income by 2030-31 and the poorest tenth seeing their incomes fall by 4.7 per cent.