There comes a point when the stealth tax stops being stealthy.
I believe we achieved this with the alleged “stealth tax” measure to freeze tax thresholds last autumn, when Jeremy Hunt faced a backlash that his predecessors had dodged.
Not everyone will be clear about what the government is up to – and what it plans to continue to do – but we have reached a tipping point where enough people have had their wages cut.
The trick that Jeremy Hunt and previous Tory chancellors have been using for years is not to raise tax thresholds in line with inflation or wages.
Tax trick: By freezing the higher tax rate, many more are included in the 40 percent tax
This means more people are being included at the bottom of the basic tax rate, the number of 40 per cent taxpayers has risen enormously and, until last April, even more people were pushed into the 45p bracket.
I say until last April, because that was when stern teacher Jeremy Hunt reversed naughty schoolboy Kwasi Kwarteng’s abolition of the 45p tax threshold, lowering the threshold for it from £150,000 to £125,410.
A report on the impact of the secret tax raid arrived this week from the Institute for Fiscal Studies, which is a leading critic of Britain’s increasingly complicated tax system and Mr Hunt’s plan to freeze tax thresholds until 2028.
The think tank revealed some shocking figures.
It says 8.9 million Britons will pay a higher rate of tax by the 2027/28 tax year, compared to just 3.2 million when the Labor government left office in 2010.
The IFS highlighted that the fiscal burden triggered by the higher tax threshold freeze introduced in 2021 is equivalent to a 6p per pound increase in the basic tax rate and the higher income tax rate.
By 2027 there will be a staggering 80 per cent more people paying a higher rate of tax than if the threshold had not been frozen at £50,270.
If it rises by the September inflation rate each year, rather than being frozen in 2021, the higher tax threshold should be £60,866 from April next year.
That means an earner who is on the threshold of 40 per cent tax in 2021 and whose wages have barely kept pace with inflation since then – and therefore have not become richer in real terms – will lose an extra £2,119 amid a cost living crisis.
The amount at which income tax begins to be paid has also been frozen at £12,570 since 2021, which would have been £15,225 from April next year if it had also risen with inflation.
Overall, the politically independent and always measured IFS believes the freeze will amount to “a whopping £52bn tax rise”.
This probably flies further under the radar than if the income tax rate had been raised, but as I said at the start of this column, many people are enlightened and upset about the hit to their standard of living.
In our report we outline how this tax crackdown will play out through 2027.
The higher income tax rate applied to fewer than 2 million people in 1990/91, but the Institute of Fiscal Studies predicts that 8.9 million people will fall into this category by 2027/28
The real tax trick is more devious, however, as Britain’s distorted tax system also includes places where the income tax threshold decides other things, or tax traps to fall into, made even worse by freezing.
An example is the interest tax. Interest on savings up to £1,000 a year is covered by the personal savings allowance, but if you are a higher rate taxpayer this threshold drops to £500 and you will then lose 40 per cent of your interest.
Meanwhile, if you sell some investments and make a profit, or hold stocks, funds or mutual funds that pay you a dividend, once you fall into the higher income tax bracket you will pay additional capital gains tax or dividend tax.
The freeze also exacerbates some of the other pitfalls in the tax system that result in marginal tax rates of 60 percent (the rate you pay on the next pound you earn).
The abolition of child benefit for households where one parent earns more than £50,000 means an effective marginal income tax rate of 51 per cent if they have one child, or 59 per cent if they have two children.
Meanwhile, the abolition of the personal allowance above £100,000 of 50p for every additional pound earned increases the marginal income tax rate to 60 percent.
Not only have these thresholds themselves been frozen since the unfair measures were introduced, but freezing the higher tax threshold also causes them to become even worse.
The parent who loses child benefit should, in theory, not suffer as much tax loss, while the earner over £100,000 should pay 40 per cent tax in a narrower band.
These are just a few examples of the mess the UK tax system finds itself in. As I have said here many times, it is high time a Chancellor got to work fixing the problem rather than making it worse.
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