Stealth tax raid on the middle classes
PM’s pledge as Nato chiefs boost their readiness to deter Russia
RISHI Sunak faced mounting pressure to set out a timetable for tax cuts last night after millions of middle-class families were hit by higher bills.
A stealth tax raid has seen nearly two million more people dragged into higher income tax brackets since the last election.
The total will soar further, with one in five taxpayers soon expected to be paying the 40 or 45 per cent rate.
Last year, Chancellor Mr Sunak froze income tax thresholds until 2026 – a move criticised as a pay cut in real terms for millions of families already hit by cost of living rises.
Some 4.3million people were paying the 40p higher or 45p additional rate of income tax when Boris Johnson won the 2019 general election.
This is now projected to rise to a record 6.1million this year – almost double the number in 2010.
Experts warned it could hit more than seven million by 2024 – meaning one in five taxpayers would be on higher rates, an increase of around 70 per cent in this Parliament, according to the pension consultancy LCP.
It prompted calls by Tory MPs for tax cuts as fears grow that the party is losing its reputation for low taxes.
The issue is that the starting point for higher rate tax has not kept pace with rising incomes. The five-year freeze on thresholds turbo- charged this trend, creating ‘fiscal drag’.
And with wages and pensions set to rise rapidly with inflation, things are likely to get worse.
LCP partner Sir Steve Webb, a former pensions minister, said: ‘Paying higher-rate tax used to be reserved for the very wealthiest, but this has changed.
‘People who would not think of themselves as being particularly rich can now easily face an income tax rate of 40 per cent.’
Tory MP Mel Stride, chairman of the Commons Treasury committee, said the Chancellor had only ‘limited’ room for tax cuts until inflation subsided, but added: ‘At that point I would expect him to come forward with a serious move towards getting the tax burden down.’
Fellow Tory MP Marcus Fysh said: ‘ We should be raising the threshold for the higher rate a long way up the income scale instead of dragging more and more middle earners into it.’
Sarah Coles, senior personal finance analyst at online broker
Hargreaves Lansdown, said: ‘With thresholds frozen until 2026, we are going to see a steady stream of taxpayers crossing thresholds and paying eyewatering levels of tax.’
She added: ‘Red-hot inflation and frozen tax thresholds are set to drive income tax to an incredibly painful £251billion – up almost a third in three years... and it’s going to get worse.’
There were 31.5million people paying income tax in 2019/2020. This is expected to rise by 2.5million to 34million by 2022/2023, according to HMRC.
Some 80 per cent pay the basic 20 per cent rate of tax. Those on the higher rate 40 percent tax are projected to hit 5.5million in the 2022/2023 tax year – up 44 per cent in three years.
The number of top earners paying 45 per cent income tax is expected to rise by almost half to 629,000 over the same period.
The tax-free personal allowance is £12,570. The 40 per cent higher rate kicks in on salaries of £50,270 or more, and the additional
45 per cent rate at £150,000. The latest Office for National Statistics figures show that average wage growth was 6.8 per cent year on year.
So someone on £47,500 last year would now be tipped into the higher tax bracket, according to calculations by AJ Bell.
Asked if the Government would cut taxes by next year Boris Johnson said: ‘Next month we’ve got a tax cut worth £330 on average for payers of National Insurance coming in. It will be a substantial tax cut.’
But Paul Johnson, of the Institute for Fiscal Studies thinktank, said it was a ‘fairy tale’ to think the Government may cut tax given its spending pressures.
‘Eye-watering levels’
BORIS Johnson vowed yesterday to spend tens of billions of pounds a year more on defence by 2030 to combat a ‘more dangerous and competitive world’.
the Prime Minister warned that the West is facing a ‘very different era’ following Russia’s invasion of Ukraine.
as the nato summit in Madrid closed yesterday, he promised that UK defence spending would rise to 2.5 per cent of national income by the end of the decade.
It is understood that this promise could amount to an extra £55billion for the armed forces over the rest of the decade.
nato secretary general Jens Stoltenberg said: ‘We face the most serious security situation in decades. We live in a world where we have actually got war going on in Europe with large-scale military operations.
‘If this becomes a full-scale war between Russia and nato, then we see suffering damage, death, destruction at this scale, which is much, much worse than what we see in Ukraine.’
Mr Johnson urged nato allies to boost their own military budgets, explaining: ‘We need to invest for the long term in vital capabilities like future combat air whilst simultaneously adapting to a more dangerous and more competitive world.’
‘In our case, that means meeting and being prepared to exceed the target we set for ourselves a decade ago of everybody spending 2 per cent of GDP on defence.’
‘Invest in the long term’
But his cash pledge caused an immediate row at home as Scottish and Welsh leaders said they would not hand over any more cash for weapons to Ukraine.
Scottish finance secretary Kate Forbes said she had agreed to provide £65million ‘on this occasion’ when pressed by the treasury, but insisted ‘this must not be seen as any kind of precedent.’ Rebecca Evans, her Welsh counterpart, said she had also been forced to give £ 30million earmarked for ‘devolved areas like health and education’.
the treasury said departments across Whitehall had been asked to contribute from areas of underspending, adding: ‘this is a response to an extraordinary crisis.’
During the two- day gathering, nato leaders agreed to return to Cold War levels of readiness, with the number of troops on high alert increased more than seven-fold to 300,000.
the UK will put more personnel, ships and aircraft on standby from the Black Seas to the Baltic and yesterday announced an additional £1billion in help for Ukraine.
as the conflict contributed to the cost of living squeeze in Britain, Mr Johnson insisted the ‘cost of freedom’ was ‘always worth paying’ and denied that his Government was complacent about rising inflation.
he vowed to intensify support for Ukraine ‘no matter how difficult it may be’, saying that Kyiv’s leaders ‘do see a way in which they can change the dynamic this year, in the next few months, and I think that’s important, and I think it means we have to help them as much as we can’.
his defence spending announcement follows public pleas from Defence Secretary Ben Wallace and Foreign Secretary Liz truss for increases in the budget.
In a speech on the eve of the nato gathering, the Defence Secretary said the British military had for too long had to survive on ‘a diet of smoke and mirrors, hollowed-out formations and fantasy savings’.
a source close to Mr Wallace yesterday said: ‘ the Defence Secretary has always been clear that as the threat changes, so should defence spending.
‘In 2020 the Prime Minister reversed decades of under investment in defence and he rightly responded to Russia’s danger by continuing to invest in defence, for which the Defence Secretary is very grateful.’
But tobias Ellwood, tory chairman of the Commons defence committee, said the latest promise was ‘too little, too late’.
Britain currently spends 2.3 per cent of GDP on defence when the budget for supporting Ukraine is included. Mr Johnson has been abroad for eight days thanks to a meeting of Commonwealth leaders in Rwanda, a G7 summit in Germany and the nato gathering in Madrid.
Meanwhile, Russia last night summoned the British ambassador to answer for what it called ‘offensive’ statements by UK politicians about Moscow’s invasion.
the Russian foreign ministry said a ‘strong protest’ was expressed to ambassador Deborah Bronnert over ‘the frankly boorish statements of the British leader
‘Offensive statements’
ship regarding Russia, its leader and official representatives of the authorities, as well as the Russian people’.
It said she was handed a memorandum stating that ‘offensive rhetoric from representatives of the UK authorities is unacceptable.
‘In polite society, it is customary to apologize for such statements.’
the ministry said Russia had told Mrs Bronnert it objected to British statements containing ‘deliberately false information, in particular about alleged Russian threats to use nuclear weapons’.