Rishi Sunak’s counterpart at the court of Louis XIV, Jean-Baptiste Colbert, has gone down in history with his declaration that ‘the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.’
It seems the Chancellor has taken to heart this manifesto for stealth taxes with a little-noticed multi-billion pound raid that is about to take effect next month.
Rishi wants us to think he has made concessions on income tax and National Insurance but millions face higher tax bills over the next four years. Nearly three million lower earners will be pulled into the tax net by 2025/6. Two million moderately well-paid people will move into the higher rate bracket, all as a result of a little-understood tax freeze announced last spring.
The effects will be far worse than the Chancellor expected, due to high inflation. If it persists, and if Rishi refuses to change course, then the damage done to people’s real incomes through this obscure tax manoeuvre will be very severe.
Bear with me as I explain how our pockets are being picked, because the Artful Dodger would be proud of it. It’s known to economists as fiscal drag.
Personal allowances and thresholds are meant to rise in line with prices, to ensure no one pays more tax simply due to inflation, rather than a real rise in their income. In his March 2021 Budget, however, Sunak said allowances and thresholds will be frozen for four years, from this April.
Since Sunak’s initial announcement, inflation has taken off. The implication is that a measure originally intended to raise £8billion will, according to forecasts from the Office for Budget Responsibility (OBR), in fact yield £20billion by 2025/6. It could be a lot more. The OBR’s figures are based on an assumption that wages will rise by 4 per cent, which is at the lower end of expectations.
Some experts, including Professor Doug McWilliams at the Centre for Economics and Business Research, believe it might amount to a £40billion tax grab.
Whatever the eventual sum, it is profoundly undemocratic. This is a multi-billion pound tax haul that has not been properly presented to Parliament or the country: in his Spring Statement, Sunak made no attempt to discuss the implications of inflation on his freeze. As the Institute for Fiscal Studies (IFS) pointed out, it more than wipes out his concessions on income tax and National Insurance.
When the Chancellor promises a cut in income tax in 2024, he is trying to bribe us with our own money.
A range of other allowances including inheritance tax, capital gains tax and the Pensions Lifetime Limit of just over £1m have also been frozen for four years.
The latter is perverse because it is a disincentive for professionals in their fifties and sixties, among whom pots of this size are common, to carry on working. Any excess over the limit is taxable at a punitive 55 per cent.
Sunak should think about this when pondering staff shortages in many parts of the economy. Around 450,000 people have left the workforce in the past couple of years, many older employees. Wouldn’t it be interesting to know how many quit because of the lifetime limit?
It all amounts to a very un-Conservative tax on incomes and wealth. What a long time ago it seems since Dishy Rishi basked in the popularity of Eat Out To Help Out.
The hissing has only just begun.