Households lose double what they save in tax cuts, says IFS
The IFS said freezing tax and benefit thresholds would take away £2 for every pound that households earn from government personal tax cuts.
The Institute for Fiscal Studies (IFS) says that by 2025-26 the freezes will take away £2 for every £1 given to households through personal tax cuts.
However, the cuts come during a four-year income tax threshold freeze, and several other tax and benefit thresholds and values are also frozen indefinitely, the IFS said.
Following the four-year personal allowance freeze, by 2025-2026 the number of taxpayers will increase to 35.4 million (66% of adults), 1.4 million more than the current number ( 34.0 million, 63% of adults), according to projections.
The four-year freeze on the top rate threshold also means that by 2025-26, 7.7 million people will pay a higher tax rate (14% of adults) – the highest rate on record – and 1.6 million more than the current figure. (6.1 million, 11% of adults), added the IFS.
Meanwhile, the decision to backtrack on plans to scrap the 45p income tax rate for high earners means that by 2025-26 there should be around three times as many taxpayers additional rate than there was when the rate was introduced (760,000 vs. 240,000).
However, the analysis focused on the evolution of benefits and personal income taxes and did not take into account the recently announced reductions in corporation tax or stamp duty. The IFS also only considered changes to the tax and benefit system that are still expected to be in place in 2025-2026, and did not include energy price guarantee, subsidies cost-of-living lump sums or the 5 pence reduction in fuel tax.
Freezes far outweigh announced tax cuts
The IFS said the ongoing four-year pause on increasing the amount people earn before paying taxes, as well as the long-term freeze on when people move to higher tax brackets , mean that the government “gives with one hand and takes with the other”.
Tom Wernham, research economist at IFS and author of the report, said: “Of all the tax and benefit changes over the next three years, the freezes on various tax and benefit thresholds and allowances are the most important and less transparent.
“The freezes go far beyond flagship policies such as the 1 pence cut in the basic rate of income tax or the cancellation of the health and social care tax, and they are expected to result in millions of people additions to the tax system and higher tax rates.
“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 wildly from what the government originally anticipated.
“For example, the unexpected surge in inflation we are now facing means that the freeze on income tax thresholds is about four times larger than expected when the policy was announced.”
The IFS has concluded that by 2025-26 the freezes will take away £2 for every £1 given to households through personal tax cuts outlined by the government.
Tom Waters, senior research economist at IFS and another author of the report, said: “Virtually every part of the tax and benefit system contains allowances, amounts or thresholds that are frozen, often indefinitely.
“Some are wacky – the Christmas bonus, paid to pensioners and disability benefit recipients, has been frozen at £10 since 1977, when prices rose more than fivefold.”
Alex Beer, wellness program manager at the Nuffield Foundation, backed the report’s findings, saying the gels had a real human cost.
She said: “The frozen tax and benefit thresholds do not take into account changes in the cost of living and therefore may not reflect household needs.
“One example is the benefit cap, where freezing the threshold dramatically increases the number of families subject to the cap and reduces the amount of actual support offered by the benefit system.
“Evidence shows that parents currently subject to the cap struggle to meet their children’s basic needs, and this increases poor maternal mental health and risks affecting children’s emotional and physical development.”
Meanwhile Tulip Siddiq, Labour’s shadow economic secretary to the Treasury, blamed the Conservative Party’s ‘trickle down economy’ for hurting people’s pockets and urged Liz Truss to cancel the ‘disastrous budget’ of his government.
A Treasury spokesperson said: “This government is committed to a high-growth, low-tax economy and helping people keep more of their hard-earned money is a key priority, as reflected in our commitments to cancel the increase in national insurance and reduce the basic rate of income tax.
“The income tax system is very progressive. This year, the top 50% of taxpayers are expected to pay about 92% of total income tax, while the bottom 25% are expected to pay only 2%.