Personal Account

Rishi ‘Mr Honest’ Sunak is going to take more of your money. You just won’t notice it happening

In Wednesday’s Budget speech, Rishi Sunak told us three times just how “honest” he was being. I think the Right Honourable Gentleman doth protest too much.

A steep corporation tax hike was the (well trailed) centrepiece of the Chancellor’s fiscal road map, while there was curiously little on the taxes affecting the money in our pockets. It could be that, as I wrote here last week, Mr Sunak is waiting until “Tax Day” later this month to unleash a torrent of consultation papers on more meaningful reform of the personal tax regime.

The “honest” bit of his speech as regards personal finances was the freezing of the amount you can earn before paying income tax, and the threshold above which you pay higher-rate, 40pc, tax. Both thresholds will rise in April then stay at the same levels – £12,570 and £50,270 – until at least April 2026. He must be confident, since the end date is after the next general election.

“Freezing tax thresholds is fair, asking more of those on higher incomes,” the Chancellor said. Does Mr Sunak realise that freezing the personal allowance will drag very low earners into the basic-rate band, reversing the policies of the past decade? Maybe he thinks that’s fair. Honest or not, freezing allowances is a clever move. It means the Conservatives don’t break their manifesto promise of not raising income tax, National Insurance or VAT but will, over time, raise billions of pounds. No one’s take-home pay is going to fall, but the bit HM Revenue & Customs keeps will slowly grow.

Monetary policy experts have been warning about the potential for high inflation since the 2008 financial crisis. Those warnings have become more earnest now that governments around the world have gone on historic spending and borrowing splurges. That will likely fuel higher prices, and wages should follow. It doesn’t take long for frozen thresholds to work like a tax rise.

Paul Johnson of the Institute for Fiscal Studies, hardly an advocate of low taxes, said: “Freezing things for a long time makes a big difference.

“In 1990, one in 15 taxpayers paid higher rates of income tax. By 2025 it will be one in six.”

Other crucial thresholds are being frozen, too. As we explain on Page 1, the maximum you can save into a pension will not rise as planned.

This matters less to people with defined benefit plans, including MPs and civil servants, who can still expect an income of £54,000 without breaching the £1.07m limit. We younger workers in the private sector, with inferior defined contribution pensions, can buy an income of just £ 28,000 a year at today’s derisory annuity rates. The case for treating these two types of pension differently grows stronger.

No change to the inheritance tax allowance was expected, but that doesn’t make it any less disappointing that it remains stuck at £325,000, the same as in 2009. In a year when Covid has brought forward tens of thousands of deaths – giving the Treasury’s death duty haul an unexpected boost – this feels particularly stingy. Rising house and share prices mean more ordinary people will be caught, while the truly wealthy keep using trusts and other tax plans to swerve IHT altogether.

‘In 1990, one in 15 of us was a higher-rate taxpayer – by 2025 this will be one in six’