Middle-class families will be up to £40,000 worse off over the next decade as a result of Jeremy Hunt’s stealth taxes to reduce government borrowing.
In last month’s autumn statement the chancellor announced plans to freeze the levels at which people pay different rates of income tax until 2028 at the earliest.
Economists warned that the decision would drag thousands more families into paying tax at a time when earnings were failing to keep pace with inflation.
Research from the House of Commons Library has shown the full effect on household income over the next ten years. It finds that a family with two earners on £60,000 a year each will be £40,880 worse off over the decade than they would have been if income tax thresholds had risen in line with inflation.
Overall a worker earning £60,000 a year will pay more than £134,000 in income tax during the next decade. That tax bill is 18 per cent higher than it would have been had the thresholds not been frozen, meaning the worker will be £20,440 worse off.
The analysis, which was commissioned by the Liberal Democrats, found that it was not just middle-class workers who will be affected by the stealth tax rises. Someone on an average salary of about £33,000 will pay an extra £4,040 in income tax because of the freezing of the personal allowance. This is equivalent to 42 days’ unpaid work over the decade.
The findings came as Dame Clare Moriarty, the head of Citizens Advice, warned that higher-income families were turning to charity for help for the first time, amid the cost of living crisis. She said that her organisation was seeing people “who thought they’d never need us”, who were in work and ineligible for benefits.
Last month Citizens Advice referred 8,500 people to a food bank for the first time. The number of people in employment who have been sent for crisis charitable support has more than doubled in the past two years. Since June this has included almost 1,000 people earning more than £2,500 a month.
In his Christmas Day address to the nation, the King emphasised his concern about the cost of living, which was making it hard for families to pay bills and forcing them to rely on food banks.
Sir Ed Davey, the Liberal Democrat leader, said that the government changes represented a “lost decade of unfair tax hikes and soaring inflation”, adding: “Families are watching aghast as their pay cheques fall while mortgage costs soar. It is deeply shameful that the Conservative government has chosen to slash taxes for the big banks while hiking them for the public. This could have all been avoided if the Conservative Party hadn’t crashed the economy and sent interest rates spiralling with their botched budget.”
Under government policy, the income tax personal allowance and higher-rate threshold are frozen until April 2028, then revert to the default policy, which is annual uprating by the consumer prices index of inflation. The analysis shows that someone earning £60,000 will be £400 worse off this year but will start noticing the decline in real-terms income significantly in following years. Next year the same individual will be £1,630 worse off; by 2024-25 the figure will be £2,570.
The research comes on top of a warning by the Resolution Foundation think tank that Hunt’s tax measures would disproportionately hit middle-income earners. It found that someone earning £62,000 loses as much from threshold freezes as someone on £124,000 in cash terms but twice as much as a share of income (2.6 per cent versus 1.3 per cent).
“A reliance on threshold freezes rather than rate rises makes the distribution of tax rises less fair, in some ways, than it could have been,” the think tank said. “Choosing stealthy fiscal drag via threshold freezes, rather than personal tax rate rises, leaves the middle hard hit as well as the top. That kind of Robin Hood can’t expect to be quite so popular with middle Britain.”
John O’Connell, chief executive of the TaxPayers’ Alliance, said fiscal drag had traditionally been known as a stealth tax but the extent of the freeze meant that many families would realise its effects.
“Families feeling the pinch will be acutely aware of the taxman taking even bigger lumps out of their household incomes,” he said.
“The 40p rate was supposed to be for those on the highest incomes, but instead it’s becoming relatively normal for taxpayers who certainly wouldn’t consider themselves as well off. Politicians have to get a grip of spending and public service delivery, rather than take the easy option of reaching further into taxpayers’ increasingly empty pockets.”