Did Kwasi Kwarteng’s mini-Budget cut your taxes? What seems like a simple question to anyone scanning the long £43bn list of tax giveaways in the mini-Budget documents is a little more murky under the surface.
For households, the Chancellor brought forward the cut to the basic rate of income tax from 20pc to 19pc and reversed the National Insurance rise – a giveaway worth £22bn next year.
It was sold as a radical departure in Britain’s tax policy, the biggest cuts for 50 years. But the Chancellor gave with one hand and took with the other.
Kwarteng’s mini-Budget is as much about what the Chancellor didn’t do as what he did. He crucially decided to keep Rishi Sunak’s policy of freezing multiple tax thresholds for four years, a stealth raid that has been turbocharged by inflation.
“If it is tax cutting, it’s not very tax cutting [when] taken in the round,” says Tom Clougherty, research director and head of tax at the Centre for Policy Studies.
“They did cut National Insurance rates but they had only raised them in April… the income tax basic rate cut Rishi Sunak had already announced, and it’s been brought forward by year so again that’s a bit of a tax cut but not a huge one.”
Clougherty says the cuts need to be weighed up against “the year by year impact of the threshold freeze”.
The market-rattling mini-Budget was perhaps not as radical as investors feared when the full picture on tax is considered, experts say.
As Britain emerged from the pandemic borrowing binge, Rishi Sunak decided to freeze a number of tax thresholds for four years, such as the personal allowance and higher rate limit on income tax.
Rising prices and wages over that period will push taxpayers into higher bands, generating more revenue for the Exchequer. This stealth tax was intended to help shore up the public finances but the “fiscal drag” effect has proved to be enormous thanks to the highest inflation for 40 years.
The Institute for Fiscal Studies estimates that for every £1 households gained from the personal tax cuts announced by Kwarteng, they will lose £2 from the freezes to tax thresholds and benefit increases by 2025-26. The Exchequer will get a £41bn boost from households paying extra tax under this fiscal drag effect but families will get just £20bn back in personal tax giveaways.
Doug McWilliams, deputy director at the Centre for Economics and Business Research, says: “The fiscal drag pushes up the tax take for virtually everyone, much more than the 1p cut the income tax rate.
“There were some taxes that were cut: stamp duty and so on. There were some taxes that would have gone up that he didn’t put up. These are genuine gains compared with the alternatives.”
The average household will face a 3.3pc hit to their incomes, equivalent to £1,450, from the freezes alone. The personal allowance freeze, for example, will cost the typical basic and higher rate taxpayer £500 and £3,000 by 2025-26, respectively.
Not only are taxpayers paying more to the Exchequer from fiscal drag but more Britons than ever before face demands from the taxman.