If Hunt does grant us a tax cut, he will no doubt make a big noise about it. Yet he’s keeping quiet about a host of other taxes that he and Prime Minister Rishi Sunak have increased by stealth.
Britons face the highest tax rates in more than 70 years but many of us fail to understand the full impact because most have been increased via a sneaky process known as fiscal drag.
This happens when the Treasury fails to upgrade tax allowances with inflation, so we hand more of our money to HMRC as wages and asset values rise.
Sunak and Hunt’s most brutal move was to freeze the income tax and National Insurance (NI) thresholds for six years.
By 2028, this will cost taxpayers a colossal £52billion a year, according to the Institute for Fiscal Studies.
Hunt cut 2p off NI in November’s Autumn Statement but that did little to mitigate the damage inflicted by his earlier tax raids. It does nothing for most pensioners, who don’t pay NI.
Voters aren’t stupid. Many will see a tax cut as a cynical electoral ploy, and they’d be right.
NFU Mutual chartered financial planner Sean McCann is calling on the Chancellor to end his tax threshold freeze. “Income tax thresholds are in desperate need of uprating to ease the burden on hard-working families.”
McCann has highlighted a string of tax allowances subject to fiscal drag and calculated how much they’d be worth without what he calls “inflationary erosion”.
Inheritance tax. The inheritance tax nil-rate band has been frozen at £325,000 since April 2009, and the main residence nil-rate band for family homes at £175,000 since 2020.
Had they kept pace with inflation they’d be worth a staggering £496,314 and £212,763 respectively. “Couples with children could leave a combined total of £1,418,154million tax free, rather than £1million,” McCann said.
Personal allowance. The point at which we start paying income tax and NI has been frozen at £12,570 since April 2021.
It would be worth £14,897 today if uprated with inflation, while the £50,270 higher rate threshold would be worth £59,576.
And that’s only the start. The tax threshold freeze is set to continue until 2028.
It will drive 6.5million Britons into paying basic rate income, many of them pensioners, while another 4.5million will be pushed into higher-rate tax band, according to the Office for Budget Responsibility.
Hunt cut the 45 percent additional rate tax threshold last April, from £150,000 to £125,141. And that’s not all.
Once someone earns £100,000 a year, they lose £1 of their £12,570 personal allowance for every £2 they earn. “Once income hits £125,141, the personal allowance goes completely,” McCann said.
Earnings between £100,000 and £125,140 are therefore taxed at a brutal rate of 60 percent, or 62 percent once National Insurance is included.
In yet another case of fiscal drag, this £100,000 threshold has been frozen for more than a decade. “Otherwise it would have increased to £147,836, greatly reducing the numbers affected,” McCann said.
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Savers also suffer from fiscal drag, with the annual tax-free Isa allowance frozen at £20,000 since April 2017. Otherwise it would have increased to £25,580.
The Junior Isa allowance has been held at £9,000 since April 2020. If uprated with inflation it would be worth almost £10,943.
The personal savings allowance (PSA) allows basic rate taxpayers to earn £1,000 a year in interest before paying tax, while high rate taxpayers can earn £500.
These limits have been frozen since April 2016. Otherwise they would be worth £1,313 and £657 respectively.
Higher savings rates mean many more now breach their PSA, while Hunt’s income tax freeze has upped the cost of doing so.
In yet another example of fiscal drag, the ability to invest up to £3,600 a year into a pension on behalf of a non-working spouse or child and claim 20 percent tax relief has also shrunk in real terms.
The £3,600 limit has not changed for more than 20 years, McCann said. “Had it kept pace with inflation, those without earned income, including retirees under age 75, could now invest £6,468 a year.”
The high income child benefit tax charge hits a million hard-working families, steadily cutting child benefit once one parent earns more than £50,000.
That threshold was in 2013. In real terms, it should now be £67,093.
The list just goes on and on. Remember it when Hunt hails himself as a tax-cutting Chancellor in March. He has an awful lot to hide.
