Revealed: £40bn stealth tax bombshell – Nine million workers face being dragged into higher tax bands by Chancellor’s freeze on allowances
- Lower-paid workers who currently pay no income tax will be pulled into the net
- Freeze on personal allowances quietly pushed through by Rishi Sunak
- Four million more Britons will be dragged into the 40% higher rate tax band
More than nine million workers are facing a £40billion stealth tax bombshell, The Mail on Sunday can reveal.
Exclusive research by the Centre for Economics and Business Research shows that five million lower-paid workers who currently pay no income tax will be pulled into the net over the next four years if inflation remains high.
They will be forced to pay tax at 20 per cent on a slice of their earnings. This is due to a freeze on personal allowances that was quietly pushed through by Chancellor Rishi Sunak.
Taking it on the chin: There has been little outcry over Rishi Sunak’s move, even though it will result in higher tax bills for millions
And around four million more Britons will be dragged into the 40 per cent higher rate tax band as a result.
There has been little outcry over Sunak’s move, even though it will result in higher tax bills for millions. The Chancellor imposed the draconian measure in March last year, before the recent rise in inflation, which has soared to 5.5 per cent – its highest for 30 years.
But the CEBR warns the pain will be significantly worse than originally thought, due to the current inflationary surge.
CEBR deputy chairman Douglas McWilliams said: ‘This is a £40billion tax rise originally planned to raise £8.2billion. It is absurd. This stealth tax rise should be reversed.’
Despite its painful effects, the big freeze has been overshadowed by Sunak’s announcement in September of a 1.25 percentage point increase in National Insurance contributions – equivalent to an approximate rise in NI payments of 10 per cent for those on average earnings.
But economists warn that the clampdown on personal allowances and tax thresholds is likely to cost Britons much more than the NI hike. McWilliams said the revenue likely to be raised is ‘twice as large as the £20billion to be raised by NI rises.’ He added that at least the latter was announced and voted through Parliament. ‘The impact of unexpected (at least by the Treasury) inflation on the freezing of allowances and bands was not voted for,’ he said.
As a result of the frozen allowances, millions of workers will face a ‘double squeeze’ as they are pushed into a higher tax band at the same time as the NI increase bites, along with rocketing household bills. In last March’s Budget, Sunak decreed that personal income tax allowances and thresholds will remain at 2021-22 levels, up to and including the 2025-26 tax year.
He has so far pressed ahead with his moratorium regardless of the fact that inflation is now high and rising, meaning that many more people will be hit by bigger tax bills.
Basic rate tax at 20 per cent is levied on incomes of more than £12,570 a year. The higher rate of 40 per cent kicks in at £50,271 and the rate of 45 per cent is charged on incomes above £150,000.
The CEBR estimates that the number of workers paying the basic rate will increase by five million to 37million by 2026. The number of higher rate taxpayers is predicted to double to eight million. The think-tank forecasts that all of this will generate an additional £40billion in tax receipts for the Treasury.
The findings triggered calls for Sunak to abandon the freeze and to upgrade the allowances and thresholds in line with inflation.
Simon French, chief economist at Panmure Gordon, said: ‘This policy becomes harder to justify if the assumptions that underpinned it back in early 2021 look increasingly out of line with the reality faced by hard-pressed households.’
Andrew Hilton, director of the Centre for the Study of Financial Innovation and a former World Bank economist, added: ‘There’s a double squeeze from rising tax bills and rising prices. It’s monstrous. Inflation pushes people into the higher tax band and the rise in prices has been jet fuelled.’
Figures quietly released by the Office for Budget Responsibility last month revealed that by last October the freeze was already expected to take a lot more out of the pockets of taxpayers than initially predicted in March.
It forecast that an additional 600,000 people would be dragged into the basic rate band by 2025- 26, taking the total pulled into the tax net to 1.9million. The OBR also predicted that an extra 500,000 people would end up paying higher rate, on top of the one million it previously anticipated. It revised its estimate of the total tax raid for the next four years upwards from £8.2billion to £13.9billion.
However, because inflation has jumped since October, the full effect is likely to be even worse.
The CEBR’s forecasts are significantly gloomier than the OBR’s because its experts predict inflation will stay higher for longer.