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UK households lose £2 in 'stealthy' freezes for every £1 in tax cuts

Photo of money. UK households are losing out
For every £1 given to UK households through headline cuts to taxes, £2 is being taken away, according to IFS analysis. Photo: Associated Press

For every £1 given to UK households through headline cuts to taxes, £2 is being taken away in “stealthy” freezes, new research has found.

According to the Institute for Fiscal Studies (IFS), households in every part of the income distribution will on average lose more from freezes over the next three years than they will gain from the headline cuts.

The new study published on Thursday has been produced in association with Citi (C) and with funding from the Nuffield Foundation.

It found that freezing thresholds, allowances and benefit amounts “can stealthily and unpredictably change the size and shape of the tax–benefit system.” This is especially true when inflation is high.

The Treasury will impose an additional £21bn of income taxes despite the tax-cutting mini-budget, meaning that the average household will be £1,450 per year worse off as a result, the Telegraph said.

Read more: UK mortgage interest rates surge past 6% to highest level for 14 years

“Much has been made about the mini-budget’s surviving high-profile tax cuts: the reductions in national insurance contributions (NICs) and the 1p cut to the basic rate of income tax,” the IFS said.

“Even without the additional-rate abolition, these are very big tax cuts relative to plans, and are likely to be enough to put considerable strain on the public finances.”

They also come in the midst of a four-year freeze to income tax thresholds. Many other tax and benefit thresholds and values are also frozen indefinitely.

As a result of the four-year freeze to the personal allowance, by 2025–26 the number of income tax payers will rise to 35.4 million (66% of adults), the IFS said.

This is 1.4 million more than the number today, which stands at 34 million, 63% of adults. By 2025–26 the freeze will be costing basic-rate taxpayers £500 per year (in today’s prices).

Watch: How to save money on a low income

The four-year freeze to the higher-rate threshold means that by 2025–26, 7.7 million people will be paying higher-rate tax (14% of adults) – the highest rate on record. This is also 1.6 million more than the figure today (6.1 million, 11% of adults).

Together with the freeze to the personal allowance, freezing the higher rate will cost most higher-rate taxpayers around £3,000 per year.

The IFS added: “The chancellor decided not to abolish the 45p rate of income tax. Because the £150,000 threshold at which this rate starts to bite has been frozen since 2010, by 2025–26 there are projected to be three times as many additional-rate income tax payers as there were when the additional rate was introduced (760,000 versus 240,000).”

Meanwhile, the number of families affected by the benefit cap is set to double to a quarter of a million by 2025–26 as a result of the cap being frozen, and half a million more families will lose some or all of their child benefit entitlement by 2025–26 compared with now.

Read more: 'Recessions are coming' amid sharp rate hikes, BlackRock warns

Tom Wernham, a research economist at IFS and an author of the report, said: “Giving with one hand and taking with the other in this way is opaque and stealthy – and when inflation is volatile the impact can vary hugely from what the government initially intended.

“For example, the unexpected bout of inflation we’re now facing means that the freeze to income tax thresholds is around four times as big a tax rise as expected when the policy was announced.”

Tom Waters of the IFS said: “Worryingly, it seems like there is a growing trend towards introducing new parameters to the system that are indefinitely frozen. This smacks of lazy policymaking. The government should kick the habit.”

Watch: How to prevent getting into debt