There comes a point when the stealth tax stops being stealth.
By my calculations, we got there with the supposed ‘stealth tax’ measure of freezing tax thresholds last autumn, when Jeremy Hunt faced a backlash that his predecessors dodged.
Not everyone will have realized what the Government has been doing (and what it plans to continue doing), but we have reached a tipping point where enough people have noticed that their wages are being taken away.
The trick that Jeremy Hunt and previous Conservative chancellors have used for years is not to raise tax thresholds in line with inflation or wages.
Tax trick: by freezing the highest rate threshold, many more are forced to pay 40% tax
Doing this brings more people from the bottom into the basic rate tax, has created a huge increase in the number of 40 per cent taxpayers and, until last April, lumped more people into the 45p bracket.
I say until last April, as it was at this point that stern schoolmaster Jeremy Hunt reversed the abolition of the 45p tax bracket by mischievous schoolboy Kwasi Kwarteng and reduced the threshold from £150,000 to £125,410.
A report on the effect of the stealth tax raid arrived this week from the Institute for Fiscal Studies, which has been a leading critic of Britain’s increasingly complicated tax system and Hunt’s plan to freeze tax thresholds until 2028.
The think tank put forward some surprising figures.
He said that by the 2027/28 financial year, 8.9 million Britons will pay higher tax rates compared to just 3.2 million when the Labor government left office in 2010.
The IFS highlighted that the fiscal drag caused by the freeze of the highest rate tax threshold, introduced in 2021, is equivalent to adding 6p in the pound to both the basic and highest rate of income tax.
There will be a staggering 80 per cent more people paying higher taxes by 2027 than there would be if the threshold had not been frozen at £50,270.
If it increases by the September inflation figure each year rather than being frozen in 2021, from next April the highest tax threshold should be £60,866.
This means that a person earning a 40 per cent tax in 2021, whose wages have kept pace with inflation since then (and therefore has not become richer in real terms), loses an extra £2,119 amid a living crisis cost.
The level at which people start paying income tax has also been frozen at £12,570 from 2021, which would be £15,225 from next April if it had risen similarly with inflation.
Altogether, the politically aloof and always measured IFS estimates that the freeze will amount to “a colossal tax increase of £52bn”.
This is arguably going more unnoticed than if the income tax rate had been increased but, as I said at the beginning of this column, many people have noticed and are angry at the attack on their living standards.
In our report, we describe how this tax raid will occur until 2027.
The highest rate of income tax applied to fewer than 2 million people in 1990/91, but the Institute for Fiscal Studies predicts that 8.9 million will fall into that category in 2027/28.
However, the real sneaky tax trick is more cunning because Britain’s twisted tax system also includes places where the income tax threshold decides other things, or tax traps that can be fallen into and made worse by the freeze.
The savings tax is an example. Interest on savings of up to £1,000 a year is covered by the personal savings allowance, but if you are a higher rate taxpayer, that 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 own stocks, funds or investment trusts that pay you a dividend, once you’re swept into the higher-rate income tax band, you’ll pay additional tax on the gains. capital or dividend tax.
The freeze also exacerbates some of the other pitfalls of the tax system that create marginal tax rates of 60 per cent (the rate paid on the next pound earned).
The removal of child benefit for households where either parent earns more than £50,000 means an effective marginal tax rate of 51 per cent if they have one child, or 59 per cent if they have two children.
Meanwhile, the removal of the personal allowance above £100,000, at a rate of 50p for every extra pound earned, raises the marginal income tax rate to 60 per cent.
Not only have these thresholds been frozen since the unfair measures came into force, but freezing the highest rate tax threshold also manages to make them worse.
In theory, the parent who loses child benefit should not lose as much in tax, while the parent earning more than £100,000 should pay 40 per cent tax in a narrower band.
These are just a few examples of the mess the British tax system is in. As I have said here many times before, it is time for a Chancellor to get to work fixing it rather than making it worse.
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