Back in Spring, Jeremy Hunt effectively put 4p on the basic rate of income tax, and he did it without the headline rate moving.
In an act of fiscal ‘blink it and you’ll miss it’ the Chancellor hit us with an effective tax rise by freezing income tax thresholds. The Tories loved going after Gordon Brown for his own stealth tax rises in the New Labour years, whether it be council tax hikes, duty increases or his own threshold freezes. But the poacher has truly turned gamekeeper, with the threshold freeze introduced in April 2021 expected to raise £29.3bn in 2027-28.
This is a classic example of so-called ‘fiscal drag: where previously income tax thresholds would increase with inflation, now that they’re frozen, workers see more of their income taxed, and taxed at higher rates. This is particularly pronounced given persistently high inflation, with workers understandably clamouring for pay rises. Indeed, in the first three months of this year public sector pay rose by an average of 5.6% and private sector pay by 7%.
But this freeze to thresholds is not just going to line the Treasury coffers. It’s going to quietly revolutionise the whole philosophy underpinning the taxation system.
For today we learn that by 2027-28 one in every seven adults will be paying at least 40% income tax – almost four times the share of adults paying the higher rate in the early 1990s. Suddenly the top rate of tax, which kicks in at £50,270, is going to be paid not just by ‘high-fliers’, but by a huge swathe of middle-class workers who probably don’t consider themselves anywhere near ‘rich’. For the young climbing the ladder, they won’t have far to go before their marginal tax rates hit the roof.
According to the Institute for Fiscal Studies, by the middle of the next Parliament one in four teachers will be a higher rate taxpayer; when John Major was prime minister, it was closer to one in 16. It’s the same story in nursing. Where previously only the most senior staff would be in the 40% bracket, many more will now find themselves forking out a hell of a lot more tax.
How did we get here?
The simple answer is that the Tories have completely lost control of public spending. Not only did Hunt increase spending in the Spring Budget, but back in November he increased it for every year until 2024-25.
Only from 2025-26 onwards does overall spending start to come down. But even then it’s not a real cut. All he has done is assume a cash freeze on capital spending and a 1% rise in resource spending (as opposed to 2.5% real previously assumed for both). Since resource spending is five times the size of capital spend, that means spending is still growing.
And all of it has to be paid for. According to the Office of Budget Responsibility’s calculations, the tax burden will hit 37.7% of GDP by 2027-28. As the OBR explained, this would be a post-war high, and is 4.7 percentage points above where it stood before the pandemic. By way of comparison, we at the TaxPayers’ Alliance previously worked out that Jeremy Corbyn’s policies would have implied the highest tax burden ever, at 37.9% by 2023-24, a term average of 37.3%.
Projections based on the OBR’s most recent ‘Fiscal risks and sustainability’ report show that public spending as a share of GDP (measured as ‘total managed expenditure’ or TME) is set to increase massively in the coming decades, from an average level of 36.4% in the 1990s, to a possible 59.1% by the 2060s. And all the while, the public sector headcount continues to increase.
These stealth taxes on ambition harm everyone, at all levels. They harm families, where a parent wants to return to work. They harm part-time employees hoping to add extra hours. And for younger people, already without a hope of getting on the housing ladder, it means their chances of social mobility are being surrendered on the alter of ever higher state spending. A tax rate designed for the few is now being charged to the many.
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