Liz Truss has promised to “grow” the UK economy – but what does this actually mean for your bank balance?
New analysis from the Institute for Fiscal Studies (IFS) claims that the prime minister is effectively introducing a “stealth” tax raid through new policies.
Here’s what you need to know.
Put bluntly...
The IFS believe that for every £1 awarded to workers by cutting main tax rates – such as National Insurance contributions – £2 will be taken away by the government.
It explains: “In every income decile, the average impact of gradual roll-outs and freezes outweighs the impact of the explicit discretionary policy changes.”
The think tank points out that Truss’s headline tax changes, new policies and the ongoing freeze for taxes and benefits work out to be “broadly regressive”.
How will the poorest be impacted?
IFS calculated that the poorest in the UK would see their incomes hit the hardest over the next three years, and are set to receive just an extra £13 per year pay rise from the recent measures.
Overall, due to the tax freezes, the poorest 10% will actually see their overall take home reduced by 2.8%.
Additional findings from the Runnymede Trust also found that Black and minority ethnic people are more likely to be in deep poverty than white people, as there have been racial inequalities to social security cuts over the past decade.
What about the richest?
The wealthiest will get an extra £2,290 a year on average, due to cuts on national insurance and income tax.
When the freezes are taken into account, the wealthiest will see a fall of only 1.1% in total.
Truss may have cut the 45p tax cut rate (meant to benefit only earners who take home more than £150,000 each year), but that’s just small fry compared to the rest of the policies which are still in place.
Here’s why...
New tax cuts
Truss and her chancellor Kwasi Kwarteng introduced £45 billion of unfunded tax cuts earlier this month, which the IFS believe will put “considerable strain” on the UK’s public finances.
These cuts included:
- National insurance rise (of 1.25 percentage points) will be reversed from November
- Basic rate of income tax cut by 1p from current 20p level, from April 2023
- Plan to increase corporation tax to 25% have been dropped, so it will stay at 19%
- Bankers’ bonus cap cut – now they can exceed twice the banker’s salary
- House-buyers only pay stamp duty tax on properties over £250,000, instead of £125,000, while first-time buyers will not pay stamp duty on the first £425,000.
Although inflation continues to soar (and is expected to climb this winter), the thresholds deciding who pays what in tax are staying the same.
For example, those earning between £50,271 to £150,000 are currently subject to the higher tax rate of 40%. But if you earn £50,271, that money will now buy you less in real-terms, due to the rising cost of living.
As IFS points out, the impact of this freeze will “grow over time” unless addressed by the government.
According to the think tank’s analysis, by 2030-31, without any changes, this will result in “the highest-income tenth seeing a 1.3% fall in income and the lowest-income tenth a 4.7% fall” from the frozen parameters alone.
To phrase this in another way, the IFS said households’ income will be reduced by £1,250 on average by 2025-26.
What taxes have been frozen?
We are only one year into the four-year freeze on income tax meaning thresholds remain the same – a policy introduced by former chancellor Rishi Sunak in April 2021.
Currently, 63% of people pay income tax. When the four-year freeze ends in 2026, this will shoot up to 66%. The number of people paying higher rates will increase to 14%, compared to 11% today.
This works out to be four times more expensive for workers than it was when Sunak first announced.
Child benefit
Things are looking tougher for those who receive child benefit, too.
Parents and guardians in the UK normally qualify for Child Benefit if they’re responsible for a child under 16. However, you’ll have to pay a tax charge, known as the ‘High Income Child Benefit Charge’, if you have an individual income over £50,000.
Again, with inflation, by the time all other costs have been considered, it means 26% of families will see their child benefit reduced or wiped out completely soon, according to the IFS.
The IFS said this is “double the proportion when the policy was introduced a decade ago”.
And, the government is reportedly considering capping benefits so it does not increase in line with inflation but in line with earnings. This works out to a real-terms cut in benefits.
The frozen benefit cap means the families with capped benefits may reach a quarter of a million by 2025 or 2026.
So, what does all this actually mean?
These policies were already restricting people’s disposable income – but the situation is only worsened when combined with the cost of living crisis.
As IFS explained: “These problems are worse in a high-inflation environment, but even in times of lower inflation, freezes reduce the transparency of tax and benefit reforms, allowing the size of the system to be changed by stealth.”
It advised: “All tax and benefit parameters should be uprated by a sensible index.
“If the government wants to raise taxes or cut benefits, it should tell us what real value it thinks the parameter in question should be, and not let it be unpredictably buffeted around by inflation.”
This research was also released after the prime minister told the UK she has “got your back” and a plan for “growth, growth and growth”.
Addressing her controversial policies, she said: “Whenever there is change, there is disruption. Not everyone will be in favour. But everyone will benefit from the result – a growing economy and a better future.”
The proportion of tax workers have to pay is approaching the highest levels in 70 years, due to the Covid pandemic, Brexit, and ongoing productivity problems from the 2008 global financial crash.
But, as research economist at the think-tank, Thomas Wernham, said: “Giving with one hand and taking with the other in this way is opaque and stealthy.
“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 levy, and they are set to drag millions more into the tax system and into higher rates of tax.”
How has the government responded?
HM 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% of income taxpayers are expected to pay around 92% of total income tax, while the bottom 25% are expected to pay just 2%.”