UK households are set to be worse off in the next three years after the recent mini-budget, a new study has claimed. Households on every income level will on average lose more from freezes over the next three years than they will gain from the UK government's recent tax cuts, according to the Institute for Fiscal Studies (IFS).
Chancellor Kwasi Kwarteng recently announced a raft of high-profile cuts including a reduction in National Insurance contributions and a 1p cut to the basic rate of income tax. Planned corporation tax rises have been cancelled but the scrapping of the 45p rate of income tax has already been reversed after triggering chaos in the financial markets. Mr Kwarteng said this week that the plan "had become a distraction from the overriding mission to tackle the challenges facing our country".
But the new IFS study has claimed that freezes to other tax and benefit thresholds in the next few years will take away £2 for every £1 given to households through the personal tax cuts by 2025/26, leaving people on all income levels worse off in three years' time.
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The study published on Thursday, produced in association with Citi and with funding from the Nuffield Foundation, found that freezing thresholds, allowances and benefit amounts “can stealthily and unpredictably change the size and shape of the tax–benefit system" which is especially true when inflation is high, as is the case now.
It said recent tax cuts, which are to be funded by government borrowing, were "likely to be enough to put considerable strain on the public finances" and that any gains for households would be cancelled out by a four-year freeze to income tax thresholds and other "stealthy" freezes to benefits. As a result of the four-year freeze to the personal allowance, by 2025/26 the number of income taxpayers will rise to 35.4 million (66% of adults) – 1.4 million more than the number today. By 2025/26 the freeze will be costing basic-rate taxpayers £500 per year in today’s prices.
The four-year freeze to the higher-rate threshold means that by 2025/26, 7.7 million people will be paying higher-rate tax (14% of adults) – the highest rate on record. This is also 1.6 million more than the figure today (6.1 million, 11% of adults). Together with the freeze to the personal allowance, freezing the higher rate will cost most higher-rate taxpayers around £3,000 per year.
The IFS report claimed that because the £150,000 threshold at which the 45p income tax rate starts to bite has been frozen since 2010, by 2025/26 there are projected to be three times as many additional-rate income taxpayers as there were when the additional rate was introduced (760,000 vs 240,000).
Meanwhile, the number of families affected by the benefit cap - which sets the maximum amount that some out-of-work families can receive - is set to double to a quarter of a million by 2025/26 as a result of the cap being frozen. The last change in the cap was in 2016 and on current plans the cap will be frozen indefinitely, meaning it bites more and more each year.
The study also said half a million more families will lose some or all of their child benefit entitlement by 2025/26 compared with now, taking the total to 2.5 million (31% of families with children), because the £50,000 threshold at which child benefit begins to be tapered away has been frozen since its introduction in 2013.
Back then, it only affected one million families (13% of those with children) but on current plans the threshold will also be frozen indefinitely, withdrawing child benefit from more and more families over time.
Tom Wernham, research economist at IFS and an author of the report, said: “Giving with one hand and taking with the other in this way is opaque and stealthy – and when inflation is volatile the impact can vary hugely from what the government initially intended. For example, the unexpected bout of inflation we’re now facing means that the freeze to income tax thresholds is around four times as big a tax rise as expected when the policy was announced."
Tom Waters of the IFS said: "Practically every part of the tax and benefit system contains allowances, amounts or thresholds that are frozen, often indefinitely. Some are farcical – the Christmas bonus, paid to pensioners and disability benefit recipients, has been frozen at £10 since 1977, in which time prices have more than quintupled. Of course, from the Treasury’s perspective, one can see that undoing such freezes might not be appealing, given the state of the public finances. But that doesn’t change the fact that there are far less opaque and arbitrary ways to raise revenue. Worryingly, it seems like there is a growing trend towards introducing new parameters to the system that are indefinitely frozen. This smacks of lazy policymaking. The government should kick the habit."
You can view the new IFS report in full here.
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