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Freezing personal tax thresholds to increase income tax is a stealth tax, whatever Rishi Sunak says

Not raising thresholds in line with inflation is predicted to raise £8bn more a year

James Moore
Wednesday 03 March 2021 17:43 GMT
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Chancellor to raise Corporation Tax to 25% from 2023

When is a stealth tax not a stealth tax? The chancellor wants us to believe it’s when he tells us he’s raiding our pay packets in his Budget speech rather than just hiding it in the raft of PDFs containing the sneaky stuff that follows. 

It’s in them too, he said, “in black and white”. Please can I have another house point for being open with the British public headteacher? 

Spare me. Chancellors, because this doesn’t just apply to Rishi Sunak, have decided that they can’t increase the headline rate of income tax. So when they need to raise revenue they do what Sunak has done: freeze thresholds and allowances in the hopes that fewer people will realise the occupant of Number 11 Downing Street is sneaking out of their homes in a black and white coloured jumper while carrying a bag labelled “swag”. 

Sunak is also holding fire for a year, so the personal allowance will rise to £12,570 before being held until 2026. Ditto the level at which people start paying the higher rate of income tax. It will increase to £50,270 before the freeze comes in. This makes sense because the chancellor wants and needs people to be spending money when the economy reopens. He may also hope the delay further camouflages the impact on people’s bank accounts.

The impact on the national account will be considerable. The Office for Budgetary Responsibility (OBR) says the upshot of these measures is that 1.3m more people will be brought into the tax system, while another 1m higher rate taxpayers will be created. These are the people who have the most reason to feel aggrieved about the chancellor’s refusal to simply raise rates. 

Freezing the thresholds is forecast to raise £8bn more a year than if they were simply increasing them in line with inflation. And there’s more to come through freezing the inheritance tax threshold, the capital gains tax exemption, the pension lifetime savings limit. 

Given the chancellor’s borrowing requirements, revenue is what Sunak, who has spent £344bn supporting the economy, needs. 

By contrast to previous Tory chancellors, he’s making businesses share some of the pain with their employees. The former were largely spared the pain of the austerity years, during which the level of corporation tax was progressively reduced to 19 per cent, with promises of more when the fiscal situation allowed. 

The theory was this would stimulate investment. It didn’t. So the chancellor’s had decided to try something new while springing a couple of surprises.

The first is the scale of the corporation tax hike, which will increase to 25 per cent from April 2023 for the biggest companies. It’s the first such increase since Dennis Healey’s Budget in 1974. 

When the reports of this policy first started to leak out, it looked like a softening up exercise was being conducted, in which scary-sounding numbers are touted before the announcement so the actual tax rise looks less nasty.

I was expecting the final number to come in at 23 per cent. But 25 it is. 

The OBR expects the measure to raise £17bn a year by 2025-26 and “to take corporation tax receipts as a share of GDP to the highest they have been since the height of the Lawson boom in 1989-90”.

Here’s the fly in the chancellor’s ointment. The problem with delaying the increase for so long is it gives ample time for companies’ finance departments to work with accountancy firms to revise their corporate structures with a view to reducing the hit. 

Those accountants will also have a field day with the two-year temporary investment allowance, which in 2021-22 and 2022-23 lets companies offset 130 per cent of investment spending on eligible plant and machinery against profits, at a cost of £12bn. 

That’s very pricey. That said, if it works there may be pressure to bring in something similar, but perhaps a bit less generous, in future years. 

Even with this, the tax burden is projected to increase to 35 per cent of GDP by 2025-2026, the highest since the late 1960s, and something Tory MPs, in particular, will hate. 

Even with this fiscal consolidation, the taxing chancellor has been told he’s going to miss all the government’s legislated fiscal targets based on the OBR’s central forecasts. This explains is why he’s not setting any more of them, for now. 

There is, of course, scope for him to revisit some, or all, of these measures before the next election. For that to happen he really needs the economy to outperform even the improved economic forecasts that the Covid-19 vaccination programme has delivered, and for interest rates, in particular, to stay low. 

Britain’s debt burden makes it very sensitive to increases, and to the bond markets, as recent events have proved. If they don’t stay low, he might have to dust down his burglar’s tools and load up his swag bag once again. 

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