- Written by Michael Race
- BBC News business reporter
image source, Getty Images
Tax cuts were a key theme in the Chancellor’s Autumn Statement, but policy decisions will not prevent taxes from remaining at record levels.
A big part of that is due to so-called “hidden” tax increases, known to fiscally constrained economists, that can have a bigger impact on household incomes than other tax increases.
It sounds pretty technical and boring, but it affects millions of people.
The term refers to the process by which more people are “dragged” into paying higher taxes on their personal income, without tax rates increasing at all.
Jeremy Hunt has announced cuts to National Insurance (NI) rates, but has chosen to leave the NI and income tax thresholds unchanged, meaning they will remain frozen until 2028. Typically, the tax base increases with inflation (the rate of increase in store prices). , but it will remain the same in 2021 and beyond.
In the wake of recent high inflation, many workers are securing pay increases to cushion the rise in the cost of living. But they pay more taxes because a larger portion of their income has been taxed or been dragged into a higher tax bracket than before.
According to official figures, there are now around 2.2 million more workers paying income tax at the basic rate of 20% compared to three years ago, and an additional 1.6 million people will fall into the 40% rate over the same period. Ta.
Critics have described tax band freezing – the level at which individuals start paying different rates of tax on their income – as a “stealth tax.” This is because this process happens gradually as individuals start earning a little more.
The NI Chancellor’s share, which is a percentage of people’s wages deducted and used to pay for benefits, the NHS and the national pension, will partially offset this so-called stealth tax.
However, income tax revenue, which is the Treasury’s biggest earner, will continue to rise.
Sarah Coles, Hargreaves Lansdown’s head of personal finance, said that while the 2% NI cut “shouldn’t be snorted at”, keeping the NI and income tax caps frozen meant that “Treasury is doing nothing to protect us from recession.” The dire fiscal shackles mean that much of the fiscal damage from these tax increases will continue to be felt years later. ”
“Fiscal drag is a powerful force, especially when tax bases are frozen in the face of an inflationary storm,” added Rais Khalaf, investment director at AJ Bell.
The Office for Budget Responsibility (OBR), the UK’s official forecasting body, estimates that nearly 4 million more people will pay income tax by 2029 as a result of this policy, and 3 million people will move into higher income brackets. ing.
Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank, said tax cuts for NI and businesses alone would not be enough to “stop this becoming the biggest tax-raising parliament of modern times”.
“Rising inflation raises tax revenues more than it pushes up spending on debt interest and social security benefits. However, it is important to note that rising inflation will raise tax revenues more than it will push up spending on debt interest and social security benefits. “Rather than using it to cover the higher costs of public services, the Chancellor has chosen to cut other taxes, particularly national insurance tax and corporation tax.”
The Resolution Foundation said the changes announced in this parliament would make the living situation of households worse off by an average of £1,200.
“The truth is that taxes are going up, not going down,” said Thorsten Bell, chief executive of the independent think tank, which focuses on improving living standards for people on low to middle incomes. said.
“The cut is [in the Autumn Statement] This will be dwarfed by the tax increases that have already begun. ”