Jeremy Hunt’s stealth tax rise to cost ‘three times more’ than first thought

Jeremy Hunt’s stealth taxes will cost households £25 billion – three times higher than predicted, a report has found.

The Chancellor announced last autumn that the threshold at which people start paying income tax and national insurance would be frozen until 2027/28 – two years longer than originally planned.

This extension, combined with higher than expected inflation, means the freeze will cost taxpayers far more than expected, the Resolution Foundation said on Friday night.

The analysis comes just days before the new tax year begins on April 6.

The think tank said that tax and benefit changes taking place next week – which includes a cut in the top rate of income tax from £150,000 to £125,140 – will see the poorest tenth of the population gain £500 on average next year.

But the typical household will lose £100 and the richest fifth will lose £1,500.

Adam Corlett, the Resolution Foundation’s principal economist, said: “High inflation has pushed up the projected revenue take from the Government’s personal tax threshold freeze to £25 billion a year – almost triple the amount forecast when the freeze was introduced.”

He added: “The myriad tax and benefit changes introduced this April highlight the challenges of such a patchwork approach to policy, which relies on short-term support schemes, stealth tax rises and an unfair council tax system.

“Difficult decisions on tax and spending policies lie ahead, but policymakers should be honest with voters about the trade-offs of these decisions.”

Freezing tax thresholds means they do not rise along with inflation – meaning people start paying higher rates of tax at a lower salary than they would otherwise have done.

Rishi Sunak, when he was chancellor, announced in 2021 that the rates would be frozen for four years.

At the time, this was predicted to net the Treasury an extra £9 billion compared to the tax take had the thresholds risen in line with inflation.

But Mr Hunt, in the aftermath of Liz Truss’s disastrous tax-cutting budget, announced the freeze would continue for another two years.

The Resolution Foundation said that higher inflation in the wake of the Russian invasion of Ukraine, together with this two year extension, will see the tax take rise to £25 billion.

Its report said: “Perhaps the most important piece of personal tax policy in 2023/24 is the decision not to raise the starting point for income tax and personal national insurance, nor the higher rate threshold.

“These remain frozen at £12,570 and £50,270 respectively, and are set not to rise before April 2028.

“If the usual CPI (Consumer Prices Index) uprating had happened this April, then those thresholds would be rising by 10.1 per cent to £13,840 and £55,340.

“For a basic-rate paying employee, that change would have been worth just over £400 (including national insurance, or £250 without), while a higher-rate payer would have gained over £900 overall.”

The report looked at the potential difference to revenue from income tax and national insurance, if the two main tax thresholds went up in line with inflation each year, rather than being frozen.

It said: “The six-year freeze as a whole is now projected to raise £25 billion in 2027-28.”

Inflation partly taken into account

Many benefits and the state pension are rising by 10.1 per cent in the new tax year.

More than eight million households receiving means-tested benefits will also benefit from enhanced cost-of-living payments in 2023/24, worth £900 over the next year.

Pensioners and those receiving disability benefits will see their additional payments repeated in 2023/24 and many workers will benefit from a 9.7 per cent rise in the National Living Wage from April.

These increases will be crucial for low-income households to cover rising costs, the Foundation said.

It said the average band D council tax bill in England will rise by 5.1 per cent in April, equivalent to a £99 annual increase.

A Treasury spokesman said: “After borrowing £400 billion to help the country through the pandemic and Putin’s energy price shock, we have had to take some difficult decisions to balance the nation’s books. To help families with the cost of living, we are providing £3,300 of support on average per household this year and next – funded through windfall taxes on energy profits.”