Britain’s leading economic think-tanks poured cold water on Rishi Sunak’s tax-cutting claims, concluding on Thursday that the vast majority of working people will be paying more in taxes on their income under the UK chancellor’s policies.
Sunak on Wednesday said his Spring Statement “delivers the biggest net cut to personal taxes in over a quarter of a century”, but the Resolution Foundation and the Institute for Fiscal Studies rejected the chancellor’s claims.
Sunak’s assertion that the government is running a low-tax economy was further undermined by Office for Budget Responsibility analysis, which showed that the freeze in the starting point for the higher rate of income tax would ensnare a record number of people paying the 40 per cent rate.
Torsten Bell, chief executive of the Resolution Foundation, said the reality of Sunak’s total package of tax increases over the past few years did “not measure up to the rhetoric” on tax cuts.
This was, he said, true despite the chancellor raising the threshold for employee national insurance contributions, cutting 5p from the duty on a litre of petrol and announcing a 1p reduction in the basic rate of income tax in 2024.
Paul Johnson, director of the IFS, said: “[Sunak] continues . . . to be a chancellor presiding over a very big increase in the tax burden. What he did yesterday was not enough even to stop the expected tax burden rising yet further.”
Johnson added that income tax revenues in 2024-25 would not drop despite the 1p cut in the basic rate because inflation was lowering the real value of tax allowances and thresholds.
“That’s the effect of inflation and fiscal drag,” he said. “[The Treasury has] magically doubled the scale of the tax rise he announced last year — the four-year freeze in the personal allowance and higher rate threshold. The proposed cut in the basic rate gives back only about half of the additional windfall he is now expecting to enjoy from that measure.”
“It looks like a median earner, on around £27,500 a year, will be about £360 worse off in the next financial year than in the current year. Someone earning around £40,000 will be getting on for £800 worse off,” added Johnson.
The OBR showed the effects of freezing allowances and thresholds on the tax rates people will pay, with higher inflation dragging millions into higher tax brackets.
It estimated that the four-year freeze of the higher rate threshold would increase the number of people paying income tax at the 40 per cent rate by 42 per cent, from 4.8mn to 6.8mn people.
For the Resolution Foundation, the effects of inflation meant that seven in every eight working people would see tax increases rather than cuts over the next few years.
Alongside the 1.25 percentage point increase in national insurance being imposed in April, it calculated that only people with incomes between £11,000 and £13,500 would pay less in taxes on their incomes from all the measures outlined by the chancellor.
“Of the around 31mn people in work, around 27mn will pay more in income tax and NI in 2024-25 thanks to changes announced since Rishi Sunak became chancellor,” the foundation calculated.
Both think-tanks highlighted how the Treasury would benefit significantly from higher inflation through increased revenue from value added tax, income tax, national insurance and corporate tax without fully compensating households or public spending departments.
This was in stark contrast, they said, to households that are facing the largest cut in living standards since comparable records began in the 1950s.
Deciding not to give back the tax windfall of £35bn a year to households would leave most of them 4 per cent worse off this year after inflation, while the poorest quarter of households would be 6 per cent worse off, the Resolution Foundation said.
Net incomes would fall 2 per cent across the 2019 to 2024 parliament, it estimated, making it the “worst on record for living standards”, with drops even greater than at the time of the global financial crisis.
Both the IFS and the Resolution Foundation also warned that the rise in national insurance tax rates, paid on employment income alongside a cut in income tax rates, paid on a wider definition of income, would unfairly advantage landlords over employees, and pensioners over people of working age.