Millions of families set to pay extra £21billion of income taxes despite talks of 'cutting taxes' mini-budget

6 October 2022, 00:22 | Updated: 6 October 2022, 06:28

Liz Truss and Kwasi Kwarteng's mini budget announced a number of tax cuts, but now a new report suggests average households will still be worse off because the tax thresholds are not changing
Liz Truss and Kwasi Kwarteng's mini budget announced a number of tax cuts, but now a new report suggests average households will still be worse off because the tax thresholds are not changing. Picture: Alamy

By Daisy Stephens

The government is being accused of "giving with one hand and taking with the other" after a report showed average households will lose more money through "stealthy" threshold freezes than they will gain from headline tax cuts.

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Freezes to tax and benefits thresholds will mean that by 2025-26, the government will take £2 for every £1 given to households through personal tax cuts, according to the Institute for Fiscal Studies (IFS).

Kwasi Kwarteng announced a tax-cutting mini budget on September 23.

The plan threw markets into turmoil - but for the average Brit it might have sounded like good news, with a reduction in national insurance contributions and a 1p cut to the basic rate of income tax among the measures announced.

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But they come during a four-year freeze to income tax thresholds, and many other tax and benefit thresholds and values are also frozen indefinitely, the IFS said.

It means that more and more people will find themselves edging into higher income tax bands, as wages gradually increase but tax thresholds stay put.

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The IFS predicted that by 2025-26 the number of income tax payers will rise to 35.4 million (66 per cent of adults) - 1.4 million more than the current number (34.0 million, 63 per cent of adults).

The four-year freeze to the higher-rate threshold also means that, by 2025-26, 7.7 million people will be paying higher-rate tax - from 11 per cent of adults to 14 per cent.

And, following the U-turn on plans to scrap the 45p rate of income tax for higher earners, because the £150,000 threshold at which the rate starts to bite has been frozen since 2010, by 2025-26 there are projected to be around three times as many additional-rate income tax payers as there were when the rate was introduced.

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The research was contained in a pre-released chapter of the 2022 IFS Green Budget, produced in association with Citi and with funding from the Nuffield Foundation.

The IFS also said there are various aspects of the benefits system where freezes are biting.

For example, around half a million more families are projected to lose some or all of their child benefit entitlement by 2025-26 compared with now - because the £50,000 threshold at which child benefit starts to be tapered away has been frozen since its introduction in 2013.

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Tom Wernham, a research economist at IFS and an author of the report, said: "Of all the changes to taxes and benefits over the next three years, freezes to various tax and benefit thresholds and allowances are the most significant and least transparent.

"Freezes far more than outweigh headline policies such as the 1p cut to the basic rate of income tax, or the reversal of the health and social care levy, and they are set to drag millions more into the tax system and into higher rates of tax.

"Giving with one hand and taking with the other in this way is opaque and stealthy - and when inflation is volatile the impact can vary hugely from what the Government initially intended.

"For example, the unexpected bout of inflation we're now facing means that the freeze to income tax thresholds is around four times as big a tax rise as expected when the policy was announced."

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The analysis focused on changes in benefits and taxes on personal incomes and did not incorporate recently announced cuts to corporation tax or stamp duty.

The IFS also only considered changes to the tax and benefits system set to still in place in 2025-26, and did not incorporate the energy price guarantee, one-off cost-of-living grants or the 5p cut in fuel duty.

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Tom Waters, a senior research economist at the IFS and another 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."

Alex Beer, welfare programme head at the Nuffield Foundation, said: "Frozen tax and benefit thresholds do not account for changes in the cost of living and as a result can fail to reflect household needs.

"One example is the benefit cap, where the threshold freeze dramatically increases the numbers of families subject to the cap and reduces the amount of real support the benefit system offers.

"Evidence shows that parents currently subject to the cap struggle to meet their children's basic needs, and that it increases maternal mental ill-health and risks affecting children's emotional and physical development."

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Tulip Siddiq, Labour's shadow economic secretary to the Treasury, said: "The Tories' failed trickle-down economics is hitting people's pockets.

"Liz Truss must reverse her government's disastrous budget now."

"I've seen 2 recessions, this is the worse it's ever been!"

A Treasury spokesperson said: "This Government is committed to a high growth and low tax economy and helping people to keep more of their hard-earned money is a key priority, as seen by our commitments to cancel the rise in national insurance and reduce the basic rate of income tax.

"The income tax system is highly progressive.

"This year, the top 50 per cent of income taxpayers are expected to pay around 92 per cent of total income tax while the bottom 25 per cent are expected to pay just 2 per cent."