The Treasury will raise an additional £20.5bn in tax in the new tax year, which is £12.5bn more than the £8bn expected at the time the income tax threshold freeze was announced in October, according to research by the Institute of Fiscal Studies (IFS).
The IFS stated that this is on top of the £13bn which will be raised through the National Insurance contributions (NICs) increase as a result of the new social care levy.
Over the last 12 months, the revenue brought in by the move decided in the Spring Budget last year has steadily increased. Figures released in October 2021 projected it would bring in £12bn and by February 2022 it was £17bn, which means in one month the tax take has risen by £4bn.
The IFS highlighted that usually income tax thresholds rise with inflation, and when the decision to freeze income tax thresholds was made the level of inflation was 1.6%. Since then, inflation has increased significantly with it expected to reach 8% in April.
At the time of the Budget, the Office for Budget Responsibility (OBR) estimated the plan would bring as many as 1.3m more people into paying income tax and 1m more into paying at the higher rate, however, as wages rise due to inflation even more people are expected to begin paying tax or pay a higher rate of tax.
Tom Waters, a senior research economist, IFS, said: ‘Inflation has risen rapidly and is expected to rise even further, peaking at more than 8%. That means that the tax threshold freeze is now on track to be a £20.5bn tax hike, two and a half times what was originally expected.
‘This episode highlights the danger with setting tax thresholds in nominal terms for long periods of time – unexpected changes in inflation can make the size of a planned tax rise much bigger or smaller than expected.’
Many have called on the Chancellor, Rishi Sunak to step up and address the cost-of-living crisis which is expected to hit millions from April with rising tax and energy costs. Former prime minister Gordon Brown is the latest voice to come forward with proposals for how the Chancellor could help those who will struggle the most come April.
In the letter, organised by Brown and signed by more than 70 Labour local government leaders, Brown urges the Chancellor to halt the 1.25% NIC increase, restore the temporary £20 a week increase for Universal Credit that was taken away in October, and update benefits in line with inflation.
He also asks that the Chancellor provide ‘significantly greater help’ for energy costs for the poorest households and put in place support for insulation costs for the poorest households as part of a programme for housing retrofits.
Brown states that the current support for energy costs put forward by the government is ‘not enough’ as the number of people in fuel poverty, which is classed as households where more than 10% of net income is spent on energy, will rise from 4.7m to almost 8m when Ofgem’s price cap rises in April.
This figure is expected to reach 12m by October if no further government support is given according to research form the University of York.
In response to the research, a Treasury Spokesperson said: ‘Our approach ensures that higher earners contribute more, while the vast majority of taxpayers will still pay the basic rate of tax by 2026.
‘We recognise the pressures people are facing with the cost of living and are providing support worth around £21bn this financial year and next to help. This includes putting an average of £1,000 more per year into the pockets of working families via changes to universal credit, freezing fuel duties to keep costs down and helping households with their energy bills through our £9.1bn energy bills rebate.
‘We’re also boosting the minimum wage by more than £1,000 a year for full-time workers and our £500m household support fund is helping the most vulnerable with essential costs.’
