The cost of the Tories’ stealth tax raid

The big freeze on thresholds is dragging millions into the clutches of a cynical cash grab. By Charlotte Gifford and Ollie Corfe

The true scale of the Tory stealth tax raid is laid bare today by Telegraph Money analysis of government data.

In 2021, Rishi Sunak froze tax thresholds across the board before Jeremy Hunt extended the freeze until 2028. But rampant inflation and rising wages have led to millions being dragged into higher rates of tax.

As a result, the Government is on track to be the biggest tax- increasing Parliament since records began, says the Institute for Fiscal Studies think tank, with the nation’s tax burden to reach a 70-year high.

Today, calls for an end to the cynical tax grab at next month’s Budget.

Our investigation reveals that: The freeze will cost two parents each earning £70,000 almost £30,000.

Higher- rate taxpayers will bear the brunt, accounting for two thirds of the extra £36.7bn of tax raised by 2028.

More than 1m workers will be paying income tax at 45p in the pound by 2028 – up from 240,000 in 2010.

A worker on £50,000 with £150,000 in savings will lose £ 6,500 owing to the freeze on the personal savings allowance.

The freeze on inheritance tax thresholds will cost a family with a £ 1.25m estate an extra £76,700 in tax.

Emily Fielder, of think tank the Adam Smith Institute, said: “Fiscal drag is continuing to drag millions of taxpayers into higher tax brackets, despite them not making any more money in real terms.

“This stealth tax is perniciously eating into our spending power, impacting both individuals and businesses as a result.”

The Chancellor’s cut to National Insurance in January – which saved the average worker £450 – is being undermined by frozen thresholds and persistent inflation, she added. Adam Corlett, of the Resolution Foundation think tank, said: “Further tax cuts are likely in the Budget, but this will remain a tax-raising Parliament, with the six-year freeze to NI and income tax thresholds set to raise around £44bn a year.”

The Chancellor is understood to now be considering a 1 percentage point reduction in the basic rate of income tax.

But analysis by the stockbroker Interactive Investor has shown that even this tax giveaway would not be as impactful as thawing the frozen thresholds.

A cut to the basic rate of income tax would save someone on £35,000 annually £240. However, if the personal allowance also rose in line with inflation, the same individual would be better off by £408 a year. By comparison, uprating the basic rate income tax threshold to £14,000, factoring in two years of inflation, would save them £429. Myron Jobson, of Interactive Investor, said: “While any cut to income tax would be a welcome boost to households, fiscal drag is to dilute any uplift – whatever form it might take.”

Our analysis shows the freeze will cost two parents each earning £70,000 a total of £ 29,856 – enough to put two children through a year of nursery. This is the extra tax lost because the income tax thresholds have not been uprated with inflation.

If increased in line with the consumer prices index, the higher rate threshold would be just over £57,000 today.

Fiscal tinkering by successive governments has pushed more and more people into higher rates of tax.

Last year, Mr Hunt lowered the threshold at which the 45pc rate kicks in from £ 150,000 to £ 125,140. This decision will bring 400,000 more into the top rate of tax, says the Office for Budget Responsibility.

By 2028, 1.3m workers will be paying income tax at the top rate of 45p in the pound – up from 240,000 in 2010.

The Chancellor also chose not to address the 60pc tax trap that comes into effect once workers earn more than £100,000.

Introduced by Alistair Darling in 2009, the personal allowance is tapered down by £1 for every £2 earned over £100,000. In real terms, this means that for every £100 of pay earned between £ 100,000 and £ 125,140, £40 is lost to income tax and £20 through the tapering of the personal allowance.

Nearly two thirds – £ 23.2bn – of the money raised by freezing the income tax thresholds and lowering the 45pc tax band will be paid by higher and additional rate taxpayers, says accountancy firm RSM.

Chris Etherington, of RSM, said: “Tax cuts may be on the way in the Budget but many taxpayers could still be worse off due to the previous stealth tax measures introduced.

“A cut to income tax or NI may be eye-catching but it is simply window dressing. The real damage has already been done by freezing tax allowances and thresholds. The Chancellor simply cannot afford to reverse these policies and any tax giveaways will just put a plaster over the problem.”

The Telegraph is campaigning to scrap inheritance tax after the frozen thresholds and surging house prices dragged

thousands more families into the net. The tax is forecast to raise £10bn per year by 2028. The residence nil- rate band, which gives homeowners an extra £175,000 allowance when passing their main property on to their children, has not been updated since 2020.

The £325,000 nil-rate band also has not changed since 2009. Had they risen with inflation, the residence nil- rate band would be worth over £200,000 and the nil-rate band nearly £500,000.

More families have been paying the 40pc rate as soaring house prices have pushed many over the frozen thresholds. Our analysis shows the stealth tax raid will cost a family with a £1m house, £250,000 in other assets and donating £100,000 to charity, £76,700 this year, rising to just under £93,000 by 2028, because more of their estate comes under the scope of inheritance tax.

Growing numbers of people also face paying tax on their savings for the first time. Basic-rate taxpayers can earn up to £1,000 in interest before having to pay tax at their marginal rate.

For higher-rate taxpayers, the allowance is £500 and additional rate taxpayers get no allowance at all. Between 2015 and 2028, a basic- rate taxpayer with £150,000 in savings will pay an extra £ 6,500 in tax because of the freeze. John O’Connell, of the TaxPayers’ Alliance, said: “The Government is draining every last drop from ordinary households by dragging them into paying higher rates of tax in order to fuel Whitehall’s spending addiction.

“The only way to give hard-pressed Brits the breathing room they need is to cut spending and raise thresholds.”

Julian Jessop, of the Institute of Economic Affairs, said: “There are two ways that the Chancellor could reverse the impact of the freeze on tax thresholds, at least in part. One would be to unfreeze thresholds. Increasing personal allowance by 10pc would cost the Treasury about £1bn. Increasing all main allowances, starting and basic rate limits by 10pc would cost £15bn.

“The other way would be to lower other taxes instead. An additional 2p cut in the basic rate of income tax would cost about £ 14bn and might generate some better headlines. However, this would help middle and higher earners more than those on lower incomes who lose most from freezing tax thresholds.”

HM Treasury said: “After borrowing £400bn to protect lives and livelihoods throughout the pandemic and energy shock, we had to take difficult decisions to pay down debt.

“However, with inflation more than halved, we have cut taxes for workers, saving the average employee £450 a year, and our tax burden remains lower than any major European economy.”