No tax rise? Don't believe it, say critics

Following the increase in national insurance contributions (NICs) that came into effect last Sunday, the Chancellor decided against further tax rises in the Budget, writes Clare Francis.

But this doesn't mean we should be lulled into a false sense of security: Gordon Brown is a master of stealth, and taxes have gone up, albeit indirectly.

Mike Warburton, senior tax partner at accountancy firm Grant Thornton, says that unless you benefit from the tax credits, you'll be worse off. The Chancellor announced in his Budget speech that under the new tax credit system, a couple, both earning and with two children, will now have their tax bill cancelled out until their income, with child benefit, is £19,800 a year. The same couple with three children will in effect see their tax bill cut to zero until their total income plus child benefit is £22,600.

But everyone else will be feeling the pinch this month with rises in NICs and council tax. And the decision to freeze personal allowances and raise income tax bands only in line with inflation, and not earnings, means many people will be paying more in income tax as well, than this time last year.

"Because the increase on tax bands has been very modest, there has been a stealth rise," says John Whiting, tax partner at accountants PricewaterhouseCoopers. "The rate bands are only going up by about 1.7 per cent, while earnings have gone up by about 3 or 4 per cent." Consequently, more people are falling into the tax net; those already paying tax are handing over more; and an increasing number of people are now in the higher-rate band.

Mr Warburton says that when Labour took office in 1997, there were around two million higher-rate taxpayers. That has now gone up to about 3.2 million and he believes a further 150,000 more people will pay higher-rate tax this year than last.

It is going to be a tough year for Mr Brown. As a result of the NI increase he will receive an extra £8bn a year, and it is estimated his coffers will be swelled by a further half a billion pounds because of the extra income tax that people will be paying. Increases in the cost of beer, wine, cigarettes and commercial stamp duty, will also help.

But for the sums to add up and the Government's spending plans to be met, the Chancellor is relying on the global economy picking up. If growth doesn't match his predictions – and a lot of economists believe it won't – Mr Brown will face three options in next year's Budget. He will either have to cut spending, increase borrowing or raise taxes.