Sunak’s five-year tax grab
Chancellor says £21bn personal tax raid is ‘honest’ approach to repairing UK’S finances in wake of Covid
‘The tax rises in this Budget are going to leave us with the highest tax burden in my lifetime, but I hope they will be temporary’
RISHI SUNAK yesterday announced a five-year personal tax raid that will bring in more than £21billion, as the bill for vast government spending during the pandemic was finally laid bare.
The Chancellor froze thresholds for income tax, inheritance tax, capital gains tax and the pensions lifetime allowance, meaning millions of people will pay more to the Treasury.
Mr Sunak also said corporation tax would jump from 19 per cent to 25 per cent in April 2023, though most smaller businesses would be spared the rise.
Mr Sunak did not hide from the tax increases as he outlined his Budget in the House of Commons yesterday, saying: “I recognise they might not be popular. But they are honest.”
It means Britain now has a tax burden higher than at any time since the Sixties, according to the Office for Budget Responsibility. The Government’s total Covid-19 economic support was pushed beyond £400billion as furlough and other major relief schemes were extended to the autumn. Meanwhile, the UK now has its highest level of borrowing since the Second World War, following a 10 per cent shrinking of the economy that was the largest fall in 300 years.
The changes to income tax thresholds mean a basic-rate payer will hand over £526 more by 2025-26 than they would have without the move. A higherrate taxpayer will be paying £2,672 more over the five-year period.
Mr Sunak’s announcements amount to the “biggest tax-raising Budget” since 1993, according to the Institute for Fiscal Studies, an influential think tank.
Paul Johnson, director of the IFS, said the Budget confirmed that “we are in a new phase of UK economic history”.
Some Tory MPS warned the corporation tax rise would stifle investment, but the Conservative backlash was lim- ited. Mark Harper, chairman of the Covid Recovery Group, told the Commons: “The tax rises in this Budget are going to leave us with the highest tax burden in my lifetime, but I hope they will be temporary. Once we have got the public finances back into shape, then the Chancellor – as he himself says, he is a low-tax Conservative – will be able to look to continue increasing public spending in line with the growth of the economy, but also be able to reduce taxes so that people can keep more of their hard-earned income.”
The tax raid, framed around Mr Sunak “levelling” with voters about finances, was matched with pledges of support and better economic news. He extended programmes designed to help people through hardship caused by Covid-19 until September, including the furlough scheme and a universal credit uplift. Both the business rates holiday for the retail, hospitality and leisure sectors and a VAT reduction for tourism will now remain for the whole year, though support will taper off.
There was also a boost for home buyers, with the stamp duty freeze extended so deals on the brink of completion do not collapse, and mortgage support created so that buyers can lay down a deposit of just 5 per cent.
Some £65billion in new measures were announced to protect the economy in response to Covid-19, taking the total cost of Covid economic support to an eye-watering £407 billion. Mr Sunak said: “I said I would do whatever it takes; I have done; and I will do so.”
There were optimistic signs amid grim figures about the huge hit the pandemic has had on the British economy, in part due to the rapid vaccine rollout.
The OBR, the independent fiscal watchdog, said the economy would return to its pre-covid level by the middle of next year, six months earlier than forecast. Unemployment will continue to rise, but its rate will peak at 6.5 per cent in late 2021, rather than the 11.9 per cent forecast last summer, meaning 1.8million fewer people out of work.
“The rapid rollout of effective vaccines offers hope of a swifter and more sustained economic recovery,” one line of the OBR’S economic and fiscal outlook report read.
However, debt is forecast by the Treasury to continue rising, peaking at 97.1 per cent of GDP in 2023-24 before falling a little in the following two years.
Underlining an at-times sobering message, Mr Sunak said: “Our borrowing is the highest it has been outside of
wartime. It’s going to take this country – and the whole world – a long time to recover from this extraordinary economic situation. But we will recover.”
Mr Sunak did not raise the rate of income tax – that would have broken the 2019 manifesto promise not to raise the rate of that tax, National Insurance and VAT. Instead, as The Daily Telegraph revealed last month, he chose to freeze the thresholds above which people pay 20 per cent and 40 per cent income tax.
That lower threshold will rise to £12,570 and remain there until April 2026. The second threshold will rise to £50,270 before freezing until that date. The decision to stop the thresholds rising with inflation means 1.3million new people will be dragged into the 20 per cent tax band and one million dragged into the 40 per cent band by 2025/26.
The move does not break the letter of the Tory manifesto pledge, but leaves the party open to accusations that it breaches the spirit of the promise. Such policies are often dubbed “stealth” tax raids because the tax rate is not being raised, yet billions of pounds – in this case about £19 billion by 2025/26 – flow into the Treasury. But Mr Sunak said: “We are not hiding it, I am here, explaining it to the House and it is in the Budget document in black and white. It is a tax policy that is progressive and fair.”
On the business front, there were two especially eye-catching tax measures.
One saw corporation tax rise from 19 per cent to 25 per cent. It is the first time the rate has been raised since Denis Healey did so in his 1974 Budget, the OBR said. However, 70 per cent of companies, around 1.4million businesses, will be unaffected, because Mr Sunak is bringing in a new “small profits rate”.
Those businesses with annual profits of £50,000 or less will continue to pay the 19 per cent rate, with only firms with a quarter of a million annual profits paying the 25 per cent rate.
The move is a major revenue-raiser, bringing in almost £48billion by 2026.
The second big business tax measure is what was dubbed the “superdeduction”, designed to trigger a wave of investment by offering 130 per cent deduction on taxable profits.
David Davis, the Tory MP and former Brexit secretary, said the corporation tax rise would “suppress investment”.
However, the Conservative backbench did not protest at the Budget during the Commons debate that followed, with many welcoming the package.