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The chancellor’s Autumn Statement focused mostly on tax reduction, but the policy choices won’t stop taxes from remaining at their highest point ever.
Economists refer to these “hidden” tax increases as “fiscal drag,” and it can have a substantial effect on household earnings. The phrase refers to a procedure wherein more people are “dragged” into paying more personal income taxes without any increase in tax rates. Jeremy Hunt chose to keep income tax and national insurance (NI) thresholds unchanged, which means they would stay locked until 2028 even though he announced a reduction in NI rates. Normally, tax thresholds increase in tandem with inflation—that is, the pace at which retail prices rise—but since 2021, they have remained unchanged.
Due to a recent era of high inflation, many workers were able to secure salary increases to help with the rising cost of living. However, since a larger percentage of their income is taxed or because they are now in a higher tax bracket than they were previously, they are also paying more tax. According to official estimates, 2.2 million more workers pay the base rate income tax of 20% than they did three years earlier, and 1.6 million more people fell into the 40% tax band during that same period. The freezing of tax bands, which determine the tax rates that apply to an individual’s wages, is referred to by critics as a “stealth tax” due to the slow implementation of the process as an individual’s income increases.
The chancellor’s cut in NI, which is a fixed percentage deducted from people’s wages and goes towards the cost of benefits, the NHS and the state pension, will partially offset this so-called stealth tax. But income tax revenues – the largest money maker for the Treasury – will continue to rise.
“The Treasury has done nothing to protect us from the misery of fiscal drag, and means the lion’s share of the damage done to our finances from these tax hikes will still continue to be felt years down the line,” said Sarah Coles, head of personal finance at Hargreaves Lansdown, even though the 2% reduction in NI “isn’t to be sniffed at.” Laith Khalaf, head of investment at AJ Bell, continued, “Fiscal drag is a powerful force, especially when tax thresholds are frozen in the face of an inflationary storm.”
The UK’s official forecaster, the Office for Budget Responsibility (OBR), has estimated as a result of the policy, almost four million more people will be paying income tax and three million will move into the higher bracket by 2029.
Paul Johnson, director of the Institute for Fiscal Studies independent think tank, said the tax cuts for NI and businesses would not be enough to “prevent this from being the biggest tax raising Parliament in modern times”.
“Higher inflation pushes up tax receipts by more than it pushes up spending on debt interest or social security benefits. But rather than use the proceeds to ease the ongoing ‘fiscal drag’ effects of threshold freezes, or to compensate public services for higher costs, the chancellor opted to cut other taxes – most notably National Insurance and corporation tax,” he said.
The Resolution Foundation said households would on average be £1,900 worse off over the current parliament period from 2019 until the next general election. “The truth is, taxes are up not down,” said Torsten Bell, chief executive of the independent think tank which focuses on improving living standards for those on low to middle incomes. “The cuts [in the Autumn Statement] are dwarfed by tax rises already under way.”
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