Budget 2021: Stealth tax rises will 'hit middle England' hard

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·4 min read
Chancellor of the exchequer, Rishi Sunak stands with the Budget Box outside 11 Downing Street ahead the budget on 3 March in London, England. Photo: Karwai Tang/Getty Images
Chancellor of the exchequer, Rishi Sunak stands with the Budget Box outside 11 Downing Street ahead the budget on 3 March in London, England. Photo: Karwai Tang/Getty Images

'Stealth' tax rises unveiled by UK chancellor Rishi Sunak in this week's budget will deliver a shock hit to the middle classes, a top think tank has warned.

Paul Johnson, head of the Institute for Fiscal Studies (IFS), said a freeze to income tax would hit "middle England" hardest.

Johnson added that further tax hikes or cuts to public services were likely. Sunak's multi-billion pound spending plans "don’t look deliverable, at least not without considerable pain," he said.

Sunak announced the government's annual budget on Wednesday, unveiling giveaways worth billions over the next year followed by a surge in tax that will leave the UK with the highest tax burden since the 1960s by the end of this parliament. Deutsche Bank dubbed it a "spend now, pay later" budget.

READ MORE: What the budget means for your taxes, housing, pensions and more

Johnson said the chancellor had transformed from "Santa Sunak" to "Scrooge Sunak cutting spending and raising taxes to the tune of nearly £50bn ($70bn) relative to his pre-pandemic plans of March 2020." The budget was the biggest tax raising event since the early 1990s.

Wednesday's budget saw the biggest increase in taxes since 1993. Photo: IFS
Wednesday's budget saw the biggest increase in taxes since 1993. Photo: IFS

One of the biggest tax changes was a freeze to income tax allowances. Allowances and tax bands have traditionally risen in line with inflation but will now be held at current levels until 2026.

The current tax free income allowance is £12,500. The threshold for the highest rate of income tax — charged at 40% — is £50,001. Both rates will increase slightly in April before being held for five years.

WATCH: UK income tax thresholds frozen

READ MORE: UK living standards to be hit as disposable income set to fall

Inflation forecasts means 1.3 million low earning workers will have to start paying income tax for the first time as a result of the freeze. The top income tax bracket should grow by 1 million.

IFS boss Johnson said the freeze to the high rate band would hit the middle classes hard. More than 1 in 10 UK workers are forecast to be paying the top rate of tax for the first time in history within five years.

"The increases in the income tax personal allowance over 2010s were key to ensuring the remarkable outcome that, during a period of severe austerity, "middle England" did not lose," Johnson wrote on Twitter on Thursday. "They will be the ones hit by freezing it over the next few years.

"In 1990, one in 15 taxpayers paid higher rate of income tax. By 2025, it will be 1 in 6. This is a very big change in the structure of income tax. The basic rate may have fallen but a lot of people are paying higher rates of income tax."

READ MORE: Rishi Sunak vows no more austerity as UK taxes rise by most since 90s

Sunak assured the public that the tax freeze would not lead to smaller pay packets. John Hawksworth, the former chief economist at PwC UK, said the freeze amounted to a "stealth taxes" and said Sunak was being "a bit economical with the truth to say no-one will see their take-home pay shrink".

The Resolution Foundation, another think tank, said in its own budget analysis published on Thursday that real incomes were set to fall this year and would grow by just 0.3% a year for the duration of this parliament — the worst outturn in history, outside the short 2015-17 parliament that was marked by the post-Brexit referendum inflation spike.

The income tax freeze is forecast to raise £19bn for the government by 2026. The Treasury will reap billions more from freezes to capital gains tax allowance, lifetime pensions allowance, and inheritance tax allowance. An increase in corporation tax to 25% should net £17bn.

READ MORE: £65bn more in COVID spending and 'biggest tax cut in history' for business

Even still, Johnson said the £65bn spending pledges announced by Sunak on Wednesday may prove undeliverable without further borrowing, more tax hikes, or cuts to public service.

Johnson said the government could be left with a £60bn budget deficit by 2026 under the worst case economic scenario set out by the Office for Budget Responsibility. Forecasts for spending on departments like the education, the NHS and defence also look "implausibly low", he said, and could force the chancellor to put his hand in his pocket again.

WATCH: Five things we learnt from the budget