Earners lose £2 in stealth tax to every £1 gained
Liz Truss’s low tax agenda disguises the reality that tax freezes over the next three years will take away £2 for every £1 given to households.
The Institute for Fiscal Studies says much has been made about the £45bn of tax cuts announced in the mini-budget, including the reductions in National Insurance contributions (NICs) and the 1p cut to the basic rate of income tax.
But they come in the midst of a four-year freeze to income tax thresholds – or fiscal drag. Many other tax and benefit thresholds and values are also frozen indefinitely.
By 2025–26 these freezes take away £2 for every £1 given to households through the headline personal tax cuts, says the IFS.
“Not only is this true overall, but households in every part of the income distribution will, on average, lose more from freezes over the next three years than they will gain from the headline cuts,” it says.
Most thresholds, allowances and benefit amounts are usually uprated in line with inflation, or sometimes earnings, so they maintain their real value over time. But freezing them can stealthily and unpredictably change the size and shape of the tax–benefit system. This is especially true when inflation is high.
Tom Waters, a Senior Research Economist at IFS and an author of the report, said: “Practically every part of the tax and benefit system contains allowances, amounts or thresholds that are frozen, often indefinitely.
“Some are farcical – the Christmas bonus, paid to pensioners and disability benefit recipients, has been frozen at £10 since 1977, in which time prices have more than quintupled.
“Of course, from the Treasury’s perspective, one can see that undoing such freezes might not be appealing, given the state of the public finances.
“But that doesn’t change the fact that there are far less opaque and arbitrary ways to raise revenue. Worryingly, it seems like there is a growing trend towards introducing new parameters to the system that are indefinitely frozen. This smacks of lazy policymaking. The government should kick the habit.”