Yahoo Finance The big lie: why taxes are going up (no matter what the Tories or Labour say)
Labour and the Conservatives are desperate to reassure middle-class voters they will not put up taxes if they win the general election.
Launching the Labour manifesto this week, Sir Keir Starmer ruled out raising income tax, National Insurance or VAT, while his deputy Angela Rayner attacked the Tories for overseeing a huge increase in the national tax burden.
Two days earlier, at the Conservative manifesto launch, Prime Minister Rishi Sunak warned that Labour would cost households £2,000 in tax – despite widespread criticism that the claim was confusing voters.
“[Sir Keir] says he’s a socialist and we all know what socialists do, don’t we? They take more of your money because they think it belongs to them,” he said, unveiling plans for £17bn worth of tax cuts.
Yet the reality is families face rising taxes whoever wins the election on July 4.
Britain’s tax burden stands at an 80-year-high and – no matter what the parties say – over the next few years it will only get bigger. This is because tax thresholds have been frozen since 2021 and will remain so until 2028, stealthily raising billions of pounds a year for the Treasury.
Both parties have admitted they will keep the tax bands unchanged if they get into power. Two weeks ago, Chancellor Jeremy Hunt told BBC Radio 4’s Today programme: “The tax rises that happened as a result of the pandemic and the energy shock, these two giant shocks, will stay for their allotted time period.”
Shadow business secretary Jonathan Reynolds has also confirmed that Labour will leave the thresholds untouched.
“If we were to form a government after the general election on 4 July, we would inherit the Government’s spending plans. Now, I’ll be candid – there are, in those plans, tax rises. The personal allowance we all get in terms of our income tax – that is set to be frozen for several years.”
The biggest stealth tax rise comes from the freezing of income tax bands, which will result in millions being dragged into higher rates by the end of the next Parliament.
The number of people paying 40pc or 45pc income tax will soar even if the Conservatives win the election – which the polls currently suggest they will not.
Most workers would be better off as a result of their manifesto plans to cut the main rate of National Insurance by two further percentage points, down from 8pc to 6pc – a tax cut worth around £450 for a worker on a typical salary of £35,000.
The Conservatives also vowed to protect retirees from paying tax on the state pension with the “Triple Lock Plus”. Pensioners’ tax-free allowance would rise every year with the highest of inflation, earnings or 2.5pc, like the state pension.
Even with the £17bn tax cuts announced in the manifesto, stealth taxes will still rake in £23bn by the end of the next Parliament.
Helen Miller, of the Institute for Fiscal Studies, said: “The National Insurance cuts put a decent dent in the forecast tax take over the next few years – £17bn worth of tax cuts is rather substantial. But taxes are still going to reach their highest level since 1949.”
Labour’s manifesto, by comparison, was one of tax rises. Last week, the party revealed an £8.6bn-a-year tax raid on non-doms, overseas property investors and private schools.
However, it also vowed not to raise National Insurance, income tax or VAT, with Sir Keir promising that there will be “no tax increases for working people” under Labour.
Despite this pledge, by the end of the next Parliament, nearly four million more people will be paying the basic rate of income tax for the first time, while three million will become higher rate taxpayers and 600,000 more will enter the 45pc bracket.
Chris Etherington, of tax firm RSM, said: “The good news is that many taxpayers are hopefully through the worst of the pain caused by the freezing of thresholds and allowances, but the finishing line is not quite in sight yet. Lower inflation should lessen the additional impact of stealth taxes but there are still huge numbers of people that will start to pay income tax, or pay it at a higher rate, in the coming years.
“The reality is that many taxpayers will be facing a higher tax burden for some time to come and it may be years before it falls substantially.”
Both parties have committed to getting debt as a percentage of GDP falling by the fifth year of forecasts from the OBR, which is currently 2028-29. Expectations of weak economic growth and high interest rates make this target very difficult to meet.
This means whoever forms the next government will have limited fiscal room for either raising taxes or increasing spending.
Ms Miller said: “The parties absolutely could unfreeze the thresholds if they wanted to. But they could only do that if they were willing to cut spending. They’ve committed to reducing debt as a share of the economy by the fifth year, so they need to either raise taxes or cut spending if they want to square the circle.”
This limited room for manoeuvre is why the costings in the manifestos unveiled this week have left many experts scratching their heads.
The Conservatives claimed their £17bn tax cuts would be funded by a £12bn reduction in the welfare bill and a £6bn clampdown on tax avoidance. But the Resolution Foundation warned spending cuts of this scale could be “extremely challenging to deliver”.
Mike Brewer, of the think tank, said: “There are big questions over whether doubling down on firm tax commitments, funded by pledges to massively cut spending in record time, really passes the plausibility test.”
Meanwhile, Labour have promised to reform the NHS, education and achieve clean energy by 2030 through £8.6bn of tax rises.
But Paul Johnson, of the IFS, said the spending increases and tax plans were “trivial” considering its ambitious proposals.
“Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this.”
Labour and the Conservatives were contacted for comment.
