Middle-class families hit by £1bn stealth tax

Government’s ‘insidious’ failure to raise thresholds in line with inflation means higher bills for thousands

More than a million middle-class families and individuals are losing more than £1 billion in tax allowances and child benefits because of fiscal drag, the Institute for Fiscal Studies has revealed. The number of people affected has risen from 647,000 to 986,000. Their tax bills would have been cut by more than £1 billion if the £100,000 threshold had been increased in line with inflation. A further 110,000 people have been dragged into the highest 45 per cent tax rate.

MORE than a million middle-class families and indivuals are losing £1billion in tax allowances and child benefits because of fiscal drag, the Institute for Fiscal Studies (IFS) has revealed.

An extra 340,000 people have seen their income tax personal allowance withdrawn over the past decade because the Government has frozen the salary threshold at £100,000 since 2018. As a result, the total number of people affected has risen to 986,000 from 647,000. Their tax bills would have been cut by more than £1billion if the Government had increased the £100,000 threshold in line with inflation.

An additional 110,000 people have also been dragged into the highest 45 per cent tax rate because the threshold has been frozen at £150,000 since 2008. This has increased the number caught by the higher rate by more than a third to 428,000.

The number of middle-class families losing child benefit this year has risen by more than 300,000, or 30 per cent, since the Government controversially ended universal entitlement. It means the number of parents losing some child benefit has risen to 1.35million because the £50,000 salary threshold has remained frozen since 2013.

Six years ago, the Government withdrew the full child benefit from families where one parent earned above £50,000 a year. Until then, it was a uni- versal benefit usually paid direct to the mother. By next year, 1.4million parents will be hit – almost a fifth (18 per cent) of all families.

If the thresholds had moved in line with inflation, the top tax rate would be £180,000, the £100,000 cut-off would have risen to £120,000 and full child benefit would not be lost until one partner earned £54,000.

The IFS said it was evidence of an “insidious” gradual retreat by the Government from the assumption that “inflation adjustments are the norm.” Such “stealth” taxes had moved from being the “rare exception to being commonplace.”

Paul Johnson, IFS director, said: “By freezing the thresholds at which child benefit is withdrawn, the personal allowance is withdrawn and the top rate of income tax applies, recent governments have, rather stealthily, increased the tax rates on high earners and the number of people facing high marginal rates of tax. If government thinks there is a case for more high-income people to pay more tax, it should be upfront about that view.”

As well as high marginal rate bands, the IFS also warned of “cliff edges”, notably with the eligibility for tax-free child care where parents can lose up to £2,000 a year of child care support at a stroke once their income exceeds £100,000.

The Treasury said increases in income tax thresholds from the autumn Budget would save higher taxpayers almost £500 in the new tax year, and that it would keep thresholds under review. “We are committed to supporting working people to keep more of what they earn and to encourage individuals to progress,” a spokesman said.