Stealth freezes to tax and benefit thresholds will take twice as much money from British households as they could gain from government cuts to general interest rates, the Institute for Fiscal Studies said on Thursday.
Liz Truss backed his tax cut strategy at this week’s Conservative Party conference, arguing it was essential to propel the economy to higher growth – even as he was forced to drop his most important measure eye-catching, the abolition of the maximum income tax rate of 45p. In tandem with the Prime Minister, Chancellor Kwasi Kwarteng insisted the Tories would ‘offer lower taxes for you and your family’.
But the IFS analysis showed that even after KwartengHis predecessor’s reversal of the increase in the rate of National Insurance contributions and the acceleration of the 1p cut in the basic income tax rate, people at all levels of the income distribution incomes had to lose more than they earned.
“The freezes far outweigh the general policies. . . and they’re ready to drag millions more into the tax system and into higher tax rates,” said Tom Waters, senior research economist at 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 wildly from what the government originally intended,” he added. .
A four-year freeze on the £12,570 tax-free personal allowance means the number of tax payers will rise by 1.4million to 35.4million – two-thirds of adults – by 2025-26. Over the same period, a higher rate threshold freeze will increase the number of people paying the 40p rate from 1.6 million to 7.7 million – the highest on record.
Meanwhile, the £150,000 threshold at which people start paying the top rate of 45p has been frozen since it was introduced in 2010 – and by 2025-26 the number of people caught will have tripled since its creation, going from 240,000 to 760,000.
These freezes will reduce household income by an average of £1,250 by 2025-26, the IFS said. Many households will also be affected by the freezing of the thresholds at which certain benefits are withdrawn. After factoring in these and other planned changes to the welfare system, households will lose an average of £1,450 a year by 2025-26, bringing £41billion back to the public purse.
It’s double the £20bn cost to the Treasury of Kwarteng’s high-profile cuts to personal tax rates – although the IFS stressed that, compared to previous plans, the cuts would exert strong pressure on public finances.
The combined effect of tax rate changes, policy rollouts and freezes will hit the poorest households the most, the IFS said. This means that Kwarteng’s tax plans remain highly regressive, even if the government does not impose further real benefit cuts in next year’s reassessment.
Given that some freezes are indefinite – particularly those on benefit values – the impact increases over time, with tenth-highest income households seeing a 1.3% drop in income by 2030-31 and the tenth poorest seeing their income drop by 4.7%.