Rishi Sunak has been accused of using a ‘stealth tax’ on income that will bring in more than double the amount he budgeted as the cost of living rises at the fastest rate in three decades.
Ahead of the Chancellor’s spring statement to the House of Commons next week, the Institute for Fiscal Studies said rapidly rising inflation means the Treasury could raise £13bn more than expected by freezing the personal income tax relief and a higher rate threshold.
He said the four-year freeze, announced by Sunak in last year’s spring budget, was expected to return £8billion to the public purse by causing millions of workers to pay more tax.
However, the Treasury’s estimate was based on a far lower rate of inflation than currently expected amid Britain’s cost of living emergency. With a dramatic rise in energy bills set for April and Russia’s invasion of Ukraine driving gas prices to record highs, the IFS said freezing income tax thresholds would now bring in £21billion to the public purse.
Paul Johnson, the director of the IFS, said: “With inflation forecasts much higher, this looks like a massive £21billion tax hike – two and a half times bigger than expected.”
Under the plan announced last spring, Personal Allowance – the level above which workers start paying income tax – will be frozen at £12,570 from the start of next month until 2026.
The higher rate income tax threshold – when workers start paying 40% instead of the standard rate of 20% – will be frozen at £50,270 over the same period.
The plan was controversial, with low-tax Tories uncomfortable with the Chancellor raising the tax burden to the highest sustained rate since the end of World War II. However, Sunak defended the measures as fair and responsible ways to deal with record levels of public debt incurred during the coronavirus pandemic.
At spring budget time, the Office for Budget Responsibility – the Treasury’s tax and spending watchdog – estimated the plan would lead to up to 1.3 million more people paying income tax. and 1 million more to be paid at the higher rate.
Although wages are rising – meaning more people will pay higher tax rates – wages are failing to keep up with soaring inflation. Official figures show inflation-adjusted wages, excluding bonuses, fell at the fastest pace in eight years in January.
Experts now say many more people will face higher tax bills. Sam Robinson, senior researcher at Bright Blue, an independent think tank on liberal conservatism, said: “Freezing income tax thresholds is a poorly targeted measure, which would increasingly benefit the wealthiest people. . After the events of the past few months, we need bold policies that provide targeted support to those who need it most during this cost of living crisis.
The Chancellor is also under pressure to drop his National Insurance contribution hike announced last autumn, which is due to come into force next month and is expected to bring in around £12billion. Labor and several prominent Tory backbenchers urged Sunak to change course in the spring declaration to help Britons cope with the soaring cost of living.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “We are facing a horrible stealth tax on our income which will cost us far more than expected.
“Freezing income tax thresholds in times of wage inflation is going to have a much bigger impact than anyone initially thought, and hit us as hard as we initially thought as the rise in insurance national would.”
The Treasury has been contacted for comments.