With two chancellors effectively at the helm, the Autumn Statement was always going to be taxing. But have they really targeted the pain on those with “the broadest shoulders” — or just those who are easiest to lean on?
By uprating benefits in line with inflation and extending the cost of living support for the poorest, Jeremy Hunt has delivered on his promises to protect the most vulnerable.
However, as inflation pushes up pay, working people will pay tens of billions of pounds in stealth taxes to fill the brunt of the fiscal black hole, because a freeze on income tax thresholds is being extended until 2028.
Sure, there were some symbolic tax hikes for the “wealthy” — including slashing capital gains tax (CGT) allowances and lowering the 45p income tax threshold from £150,000 to £125,140 from next April.
This means someone currently earning £150,000 will pay an extra £1,243 in income tax per year. But the same increase applies to someone who earns more than £1mn.
Anyone who is seriously rich will be relieved that the chancellor did not align CGT rates with income tax, which would have cost them far more than simply lopping £6,300 from the annual tax-free allowance.
Paring back dividend allowances will squeeze investors and directors of limited companies a little more but, again, dividend tax rates remain lower than equivalent rates of income tax.
In fact, rather than imposing wealth taxes on the richest, the Autumn Statement’s use of stealth taxes will wring the squeezed middle even tighter.
But the concept of wealth is relative. Six months into the pandemic, an FT survey found half of readers supported a one-off wealth tax to shore up the public finances. The much harder question was who should pay it — invariably, the answer was “people who are a little bit better off than I am”.
Applying that caveat, you might think people with salaries in the high five-figures and low six-figures have nothing to worry about. Certainly, compared with the impact on those on the lowest incomes, the cost of living crisis has been nowhere near as brutal.
Nevertheless, the soaring cost of renting and childcare is applying a stranglehold to the finances of a growing band of relatively wealthy young professionals.
The shortage of private rental properties in London pushed average monthly rents to a record high of £2,100 this week, according to estate agent Hamptons. Across the UK, in general, rents are rising at their fastest pace since the financial crisis.
If 9 per cent of your pay cheque is already going towards repaying student loans, this will be even more of a squeeze.
Parents have the most to fear from frozen tax thresholds, though. Childcare costs are also at record levels, with nursery fees paid by better-off parents cross-subsidising huge shortfalls in the government’s funding model.
But if one parent’s income nudges over £100,000, the family immediately loses thousands of pounds worth of “free” nursery hours and tax-free childcare.
Then there’s the £50,000 threshold at which child benefit starts to be removed. Introduced in 2013, this would now start at £63,000 had it risen in line with inflation. The Institute for Fiscal Studies estimates another 700,000 families will lose some or all of their benefit by 2028.
And even if you don’t have children or rent a property, anyone earning between £100,000 and £125,140 will know that 45p rate is not the top rate of tax.
On this band of income, the removal of the personal allowance adds up to a marginal tax rate of 60 per cent — a quirk of the system that most people only find out about when a tax bill arrives.
This clawback system was introduced in 2010 when the personal allowance was around half its current size. Over the years, the allowance has increased to £12,570, lifting more of the lowest earners out of paying tax, but widening the 60 per cent band at the top.
Arguably, the chancellor has missed an opportunity to simplify the tax system by lowering the 45p threshold to £100,000 and, as a quid pro quo, removing the clunky clawback mechanism, which would at least save six-figure salary earners from the hassle of completing annual tax returns.
Claer Barrett is the FT’s consumer editor and the author of “What They Don’t Teach You About Money”. [email protected]; Twitter and Instagram: @Claerb