Britain cannot afford to stealth-tax the middle classes into oblivion
In 1992 just 3.5pc of UK adults paid the 40p upper rate. Now 20pc of us are hit by this unfair burden
‘Tax rises embody an inertia that plagues modern-day politics’
Idon’t know anybody who thinks nurses and teachers are rich. Indeed, so far this year, whenever we have heard about nurses’ and teachers’ pay, it has been about trade union leaders demanding large increases because of the cost of living. Yet in four years’ time, one in eight nurses and one in four teachers will have become higher-rate taxpayers.
And they aren’t alone. New analysis set out by the Institute for Fiscal Studies shows that fully 20pc of the tax-paying population will have drifted into the higher rate band by 2027-28, affecting large numbers of electricians, fitters and other tradespeople in addition to the public sector workers who tend to attract the most headlines.
This is the result of “fiscal drag”: the consequence of the Treasury not raising income tax thresholds in line with inflation. We are just into the second year of a planned six-year freeze in those thresholds, set at £12,570 to start paying tax and £50,270 to cross over into the 40p rate.
As stealth taxes go, this isn’t going to be particularly stealthy. The Office for Budget Responsibility has calculated that the freeze will raise £29.3bn in 2027-28, equivalent to a jaw-dropping 4p increase in the basic rate of income tax. There will be 2.1m new higher rate taxpayers, while 350,000 more people will hit the additional 45p rate. Make no mistake: people up and down the country are going to really feel the pain.
The situation could hardly have been more different in 1991-92. In the year after the departure of Margaret Thatcher, the IFS report shows that just 3.5pc of UK adults paid the 40p upper rate.
Taxes affect how a society behaves. As Thatcher said of her time in office, “Economics are the method; the object is to change the heart and soul”. We now risk changing our society’s heart and soul to ones that accept everhigher taxes as inevitable, or even desirable – a reversal of the Thatcher revolution.
The issue isn’t restricted to personal taxation, of course. Corporation tax has just increased from 19pc to 25pc – a huge blow to British competitiveness. Pharmaceuticals giant Astrazeneca recently chose the Republic of Ireland over the UK for a new £330m investment. Corporation tax in Ireland is just 15pc. Earlier this month, the head of British-based Revolut, Europe’s most valuable fintech company, said our country is suffering from “extreme bureaucracy” and high taxes – and added that if the company were to go public, he would list in the United States rather than the UK.
None of this is happening by accident. If appetite grows with eating, the British state is still firmly at the kitchen table. In 2021, the OECD shows that UK government spending as a percentage of GDP was 48.4pc, equivalent to the Scandinavian social democracies like Sweden and Norway, significantly higher than either the United States or Japan, and in stark contrast to Australia (41.4pc) and rising economies like Korea (38.1pc).
It is time for a moment of levelling with the British public. What is happening in our society is not sustainable, and it will leave us all poorer until we do something about it.
Some of this is about spending. Our public spending plans have been hit twice over by Covid and the war in Ukraine. Our debt interest payments this year will be £116bn – rising interest rates are not solely affecting household borrowers but the Government, too. The route to further massive borrowing is all but closed.
Britain is still a wealthy country, and there are certain things we should prioritise: our health service, strong defence and policing. But we shouldn’t view them as sacrosanct and beyond reform. We need to be resolute in the face of unaffordable trade union pay demands and also ask ourselves some searching questions. Just 2pc of all journeys in the UK are on the railways – can we continue to provide a massive subsidy to routes that simply do not pay their way? Why is charging for a missed doctor’s appointment on the NHS such an unthinkable proposition? Why do we increase benefits by inflation rather than in line with average earnings?
But on the other side of the coin is economic growth. Again, we need to face up to difficult choices. People need homes. We aren’t building enough by the order of hundreds of thousands every year, and young people can’t afford to rent, let alone buy. We won’t be able to build all we need on brownfield sites, though these areas should be prioritised. So we need to have a proper debate: what are the design codes that would make new homes beautiful? How can we ensure infrastructure levies support new schools and roads? Do we want new towns to concentrate on new building? What should the incentives and penalties be to ensure local councils meet local need?
And rather than shying away from Brexit, we need to lean into it. We need to accelerate the abolition of legacy EU legislation so we can tackle burdensome product specifications other than a general safety duty, and the nightmare that is GDPR. We should be looking at the distorting effect of the VAT threshold for small businesses and ending the crazy situation whereby some companies stop trading for the year rather than risk crossing the £85,000 line.
In other words, Britain needs a reality check. Tax rises embody an inertia that plagues modern-day politics. But if we do not curb our spending addiction, if we do not embrace the policy solutions that will make our economy healthier, then the choices will only become harder. The stealth tax raid currently underway will only be the first of many.
Real economic pain is coming to family finances – and healing will come only when we have a more grown-up national conversation about the limits of the possible and the keys to success.