Pressure is mounting on Jeremy Hunt to cut taxes in Wednesday’s autumn statement due to evidence that almost 4 million UK workers are to be dragged into paying income tax for the first time.
In a crunch week for the government, Rishi Sunak fuelled expectations on Monday that his chancellor could use his speech to the Commons to launch personal tax cuts, saying the government could now “look forward” to the future after making progress on the economy.
The government is on course to bring 3.9 million workers into paying income tax by the middle of the decade through a freeze on income tax thresholds, according to research shared with the Guardian by the Joseph Rowntree Foundation (JRF) poverty charity.
Freezing income tax thresholds will hold back income growth
Underscoring the impact of the so-called “stealth tax” during the cost of living crisis, it found as many as two-thirds of people being brought into paying tax would be from the lowest-income half of households in Britain.
The income tax freeze was first announced by Sunak two years ago during his time as chancellor as part of a push to find budget savings. Extended by Hunt in last year’s autumn statement until 2027-28, it has been described as the biggest revenue-raising measure for more than 40 years.
Freezing tax thresholds, rather than allowing them to rise with inflation as is usual, pulls more workers into paying higher rates of income tax when their earnings rise.
Speaking on Monday to announce the next stage of his economic plan, Sunak preempted his chancellor’s statement by announcing five new priorities for his government – including cutting tax and rewarding hard work.
“We held firm, and with inflation halved, we can now look forwards to the kind of economy we want to build,” he said at a low-key speech in north London.
“Now that … our growth is stronger, meaning revenues are higher, we can begin the next phase and turn our attention to cutting tax …
“We will do this in a serious, responsible way … and we can’t do everything all at once. It will take discipline and we need to prioritise. But over time, we can and we will cut taxes.”
Other potential measures have been reported this week, with the BBC saying VAT on period pants – reusable absorbent underwear – will be removed and the Times reporting that planned changes to benefits could mean people with mobility and mental health conditions are told to apply for jobs that allow them to work from home.
Sunak’s remarks raised hopes among Tory MPs that he would honour his pledge to reduce the 20p basic rate of income tax, even if just by 1p.
Millions of workers will be dragged into higher rates of income tax
During the Conservative leadership contest in the summer last year, he said he wanted to lower the rate to 16p by the end of the next parliament. But during his time as chancellor he set a course to raise billions of pounds from households through a policy known as “fiscal drag” by economists.
The Office for Budget Responsibility, the Treasury’s economics forecaster, said in March it expected the number of taxpayers to rise to 38.2 million by the end of the freeze – about 3.2 million more than would have been the case if the policy was abandoned.
However, with inflation sticking at higher levels than expected, the JRF said more people would be pulled into income tax – increasing the number hit by the policy to 3.9 million. Rather than raising £8bn over four years as first expected by the Treasury, the six-year freeze is now also on track to raise about £54bn by 2027-28.
changes to mean UK annual household income
Although it will drag poorer households into paying income tax for the first time, the policy will have a far bigger impact on high earners – with the JRF estimating that the top 10% richest families will pay more (£13.3bn) than the lowest half combined (£13bn).
Peter Matejic, chief analyst at the JRF, said the government’s generating billions of pounds more in revenue than it expected could be used to increase benefits for the poorest households or to invest in public services.
“It’s important for the chancellor to commit to using all the levers he has to ensure that everyone can afford the essentials so that people are not going hungry or cold in a country like ours,” he said.
According to analysis by the Institute for Fiscal Studies (IFS), the freeze will mean workers on the “national living wage”, about £19,000 a year, will be £135 worse off this year, with the impact rising to £637 a year by 2027-28.
Coupled with pressure on households from rising living costs, it said an average worker’s take-home pay was on track to have grown by just 0.3% from the start of the Covid pandemic, and by only 1.6% by the middle of the decade.
The IFS also expects the policy to drag millions of workers into higher income tax brackets, including one in four teachers and one in eight nurses. It estimates a worker earning £60,000 will be £814 worse off this year, rising to £1,944 a year by the end of the six-year freeze.
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The analysis comes as Hunt weighs up whether to target inheritances, income tax or support for businesses, funded in part by announcing cuts to benefits, alongside the swelling of receipts for the exchequer from bringing more workers into paying income tax.
However, the chancellor downplayed the potential for sweeping changes on Wednesday, telling a conference hosted by the CBI lobby group in London that he was not in a position to do “every single thing” being asked of him.
“This is a moment when, having made progress on inflation, we want to focus on the long-term growth of the British economy,” he said.
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With the government under pressure from backbench Conservative MPs to launch sweeping tax cuts before the next general election to revitalise the party’s flatlining performance in opinion polls, government sources suggested that a cut in national insurance was more likely than a cut in the basic rate, which could cost billions and potentially increase inflation.
Sunak’s remarks about rewarding hard work raised expectations that he is looking at cutting NI for the self-employed, who currently face 9% on profits between £12,570 and £50,270 and 2% on anything above this.
One minister said: “I’d expect a decision on income tax to be deferred to the spring. We’ll need a big tax offer before the next election.
“Rishi will do what he thinks is right for the economy now and won’t revert to a populist agenda on tax. He’s under political pressure from the right of the party but he doesn’t fear them.”
In his speech, Sunak stressed that the focus was “very much the supply side” of the economy in a signal that business tax cuts are more likely than personal ones.
Government insiders expect an announcement on extending business tax relief on investment to boost flatlining growth.
